How is the sales volume in dollars necessary to reach a target profit calculated?

• A. By multiplying total variable costs by the contribution margin ratio.
• B. By dividing the sum of fixed costs and target profit by the contribution margin ratio.
• C. By dividing net sales by total fixed costs.
• D. By subtracting variable costs from net sales.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of contribution margin ratio. The contribution margin ratio is calculated as the contribution margin (sales revenue minus variable costs) divided by sales revenue. It represents the percentage of sales revenue that contributes to covering fixed costs and generating profit.
2. Step 2: Identify the components needed to calculate the sales volume in dollars to reach a target profit. These components include fixed costs, target profit, and the contribution margin ratio.
3. Step 3: Add the fixed costs and the target profit together. This sum represents the total amount that needs to be covered by the contribution margin to achieve the target profit.
4. Step 4: Divide the sum of fixed costs and target profit by the contribution margin ratio. This calculation determines the sales volume in dollars necessary to reach the target profit.
5. Step 5: Ensure clarity in the formula: \( \text{Sales Volume} = \frac{\text{Fixed Costs} + \text{Target Profit}}{\text{Contribution Margin Ratio}} \). This formula provides the required sales volume in dollars.