Wang Co. manufactures and sells a single product that sells for $450 per unit; variable costs are $270 per unit. Annual fixed costs are $800,000. Current sales volume is $4,200,000. Management targets an annual pre-tax income of $1,125,000. Compute the dollar sales to earn the target pre-tax net income.

The dollar sales required to earn target pre tax net income is $4,812,500

Explanation:

The pre tax net income is the income calculated after deducting all the expenses from sales revenue except for tax. We will use the break even analysis modified for target profit to calculate the dollar value of sales needed to earn the desired pre tax income.

The dollar break even point is calculated by dividing the fixed cost by the contribution margin ratio. To calculate the revenue required to earn the desired profit, we add the desired profit to fixed cost and divide it by the contribution margin ratio.

Contribution margin ratio = (450 - 270) / 450     =   0.4 or 40%

Dollar Sales required to earn target profit = (800000 +  1125000) / 0.4

Dollar Sales required to earn target profit = $4,812,500

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