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ACCA Applied Skills · Performance Management · Cost-volume-profit analysis (CVP)

Kestrel Co sells a product for $50 per unit with variable costs of $30 per unit. Fixed costs are $120,000. The company wants a target profit of $40,000. What sales revenue is needed?

Sales revenue of $400,000 is needed. Fixed costs plus target profit equal $160,000 of required contribution, and with a contribution to sales ratio of 40% ($20 on $50), revenue must be $160,000 divided by 0.40.

  1. A$300,000
  2. B$400,000Correct
  3. C$200,000
  4. D$250,000

Explanation

Contribution per unit = $20, C/S ratio = 40%. Required contribution = 120,000 + 40,000 = 160,000. Sales revenue = 160,000 / 0.40 = $400,000 (8,000 units). $300,000 is break-even revenue, ignoring the target profit.

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