Break-Even Sales: Sales for Target Profit Health-Temp Company is a placement age

Question

Break-Even Sales: Sales for Target Profit

Health-Temp Company is a placement agency for temporary nurses. It serves hospitals and clinics throughout the metropolitan area. Health-Temp Company believes it will place temporary nurses for a total of 24,500 hours next year. Health-Temp charges the hospitals and clinics $110 per hour and has variable costs of $86.90 per hour (this includes the payment to the nurse). Total fixed costs equal $545,391.

Required:

1. Calculate the contribution margin per unit and the contribution margin ratio (express the ratio as a decimal rather than a percentage). If required, round your answers to two decimal places.

2. Calculate the sales revenue needed to break even.
$

3. Calculate the sales revenue needed to achieve a target profit of $143,220.
$

4. What if Health-Temp had target operating income (profit) of $175,560? Would sales revenue be larger or smaller than the one calculated in Requirement 3?

Explanation / Answer

Answer:-1)- Contribution margin per unit/hour=Revenue per hour-Variable cost per hour

=$110 per hour - $86.90 per hour =$23.10 per hour

Contribution margin ratio =( Contribution margin per hour/ Revenue per hour)*100

=($23.10 per hour/$110 per hour)*100 =21%

2)-Sales revenue needed to break even =Fixed cost/ Contribution margin ratio

=$545391/21% =$2726955

3)- Sales revenue to achieve target profit= Fixed cost+ Target profit/ Contribution margin ratio

=$545391+$143220/21%

=$688611/21%

=$3279100

4) If Health-Temp had target operating income (profit) of $175,560, the sales revenue would be larger than the one calculated in Requirement 3 (ie-$3433100-$3279100=$154100
Explanation:-

$545391+$175560/21%

=$720951/21%

=$3433100

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