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Sir,
In Kaplan Revision Kit, There is a question EC Ltd summarised below.
C/S ratio of Product X is 0.55
Attributable Fixed Cost of Product X is $455,000.Calculate the sales revenue required on Product x in order to recover the attributable fixed costs and provide a net contribution of $700,000 towards general fixed costs and profit?
Answer is (455,000+700000)/0.55=$2,100,000
The formula used above is (Fixed cost + Desired Profit)/CS ratio.
I did nt understand why the contribution has been put in place of profit.
pls explain this part
Usually, we are looking for breakeven (i.e. a profit of zero) in which case the break-even revenue is the fixed costs divided by the CS ratio, because the contribution needs to equal the fixed costs.
In this question, the contribution needed is that which will cover the attributable fixed costs and in addition give the required contribution of 700,000.
The formula you quote is not what has been used in this question.
Have you watched my free lectures on CVP analysis? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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