Rodney Rogers, a recent business school graduate, plans to open a wholesale dairy products firm. Rogers expects first-year sales to total $5,500,000. He desires to earn a target pretax profit of $1,000,000 during his first year of operation. Variable costs are 40 percent of sales.
a. How large can Rogers’s fixed costs be if he is to meet his profit target?
b. What is Rogers’s breakeven level of sales at the level of fixed costs determined in part a?