Discussion
The amount of sales needed to attain a desired profit is calculated by dividing .................... by the contribution margin ratio.
Answer: C
Required sales are found by dividing Desired profit plus fixed cost by the contribution margin ratio.
Each rupee of sales leaves a contribution equal to the contribution margin (P/V) ratio. To earn a target profit, total contribution must cover the fixed costs and then provide the profit:
\[ \begin{aligned} &\text{Required sales} \\ &= \frac{\text{Fixed cost} + \text{Desired profit}}{\text{P/V ratio}} \end{aligned} \]
Dividing fixed cost alone gives the break-even sales, where profit is zero. Dividing desired profit alone ignores the fixed costs that must be recovered first, and variable cost is already taken out in computing the contribution margin ratio.
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