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Business Strategy and Accounting Basics

In a business with fixed costs of ¥30 million and a variable cost ratio of 60%, which is the sales needed to make a profit of ¥10 million?

  1. Aabout ¥66.67 million
  2. B¥85 million
  3. C¥100 million
Show answer and explanation

Answer: C. ¥100 million

The contribution margin, sales minus variable costs, must cover both the fixed costs and the target profit. The contribution margin ratio is 1 − 0.6 = 0.4, so the required sales are (30 + 10) ÷ 0.4 = ¥100 million. As a check, with sales of ¥100 million the variable costs are ¥60 million, so the profit is 100 − 60 − 30 = ¥10 million.

  • A. This divides (fixed costs + target profit) by the variable cost ratio (0.6). The divisor should be the contribution margin ratio (0.4).
  • B. This simply adds the target profit to break-even sales (30 ÷ 0.4 = ¥75 million). An increase of ¥10 million in sales raises profit by only 40% of that, ¥4 million.
  • C. Correct. It is (fixed costs + target profit) ÷ contribution margin ratio.
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