Question

ZIA Motors is a small automobile manufacturer. Chris Rickard, the company’s president, is currently evaluating the company’s performance and is considering options that might be effective at increasing ZIA’s profitability. The company’s controller, Holly Smith, has prepared the following cost and expense estimates for next year based on a sales forecast of $3,000,000.
Direct materials ..........$ 800,000
Direct labor ............. 700,000
Factory overhead .......... 750,000
Selling expenses ........... 300,000
Other administrative expenses ..... 100,000
$ 2,650,000
After Chris received and reviewed the cost and expense estimates, he realized that Holly had given him all the data without breaking it out into its fixed and variable components. He called her and she told him the following: “Factory overhead and selling expenses are 40 percent variable, but other administrative expenses are 30 percent variables.”

Required
A. How much revenue must ZIA generate to break even?
B. Chris Rickard has set a target profit of $700,000 for next year. How much revenue must ZIA generate to achieve Chris’s goal?



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  • CreatedMarch 11, 2015
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