Desired Profit in Sales Dollars

Let’s assume a company needs to cover $2,400 of fixed expenses each week plus earn $1,200 of profit each week. In essence the company needs to cover the equivalent of $3,600 of fixed expenses each week.
Presently the company has annual sales of $100,000 and its variable expenses amount to $37,500 per year. These two facts result in a contribution margin ratio of 62.5%:

Sales $100,000

Variable Expenses – 37,500

Contribution Margin $ 62,500

Contribution Margin Ratio = Contribution Margin ÷ Sales

Contribution Margin Ratio = $62,500 ÷ $100,000

Contribution Margin Ratio = 62.5%

The amount of sales necessary to give the owner a profit of $1,200 per week is determined by this break-even point formula:

Break-even Point in Sales $ per week = Fixed Expenses per week ÷ Contribution Margin Ratio

Break-even Point in Sales $ per week = $3,600 per week ÷ 62.5%

Break-even Point in Sales $ per week = $5,760 per week

To verify that this answer is reasonable, we prepared the following schedule:

Per Week

52 Weeks

Sales

$ 5,760

$ 299,520

Variable Expenses (37.5%)

2,160

112,320

Contribution Margin

3,600

187,200

Fixed Expenses

2,400

124,800

Profit

$ 1,200

$ 62,400

As you can see, for the owner to have a profit of $1,200 per week or $62,400 per year, the company’s annual sales must triple. Presently the annual sales are $100,000 but the sales need to be $299,520 per year in order for the annual profit to be $62,400.