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 23,500 hours next year. Health-Temp charges the hospitals and clinics $90 per hour and has variable costs of $75.60 per hour (this includes the payment to the nurse). Total fixed costs equal $321,000.

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 $100,000.
$

4. What if Health-Temp had target operating income (profit) of $110,000? Would sales revenue be larger or smaller than the one calculated in Requirement 3?

Larger

Smaller

By how much?
$

Explanation / Answer

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.

Contribution margin per hour = (90-75.60) = 14.40 per hour

Contribution margin ratio = 14.40*100/90 = 16%

2. Calculate the sales revenue needed to break even.

Break even ($) = Fixed cost/contribution margin ratio

= 321000/.16

Break even ($) = 2006250

3. Calculate the sales revenue needed to achieve a target profit of $100,000.

Sales revenue on target profit = (321000+100000)/.16 = 2631250

4. What if Health-Temp had target operating income (profit) of $110,000? Would sales revenue be larger or smaller than the one calculated in Requirement 3?

Sales revenue would be larger..by (2693750-2631250) = $62500

(321000+110000) /.16 = 2693750

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