Question

Bloom Company management predicts that it will incur fixed costs of \(160,000 and earn a pretax income of \)164,000 in the next period. Its expected contribution margin ratio is 25%. Use this information to compute the amounts of (1) total dollar sales and (2) total variable costs.

Short answer

1. Total dollar sales:$1,296,000.
2. Total variable cost:$972,000.

Step-by-step solution

Definition of Variable Cost

The cost incurred by the business entity change in the same direction as the product output level changes, known as a variable cost. It is deducted from the sales made to calculate the contribution margin.

Total dollar sales

Calculation of contribution margin:

Particular	Amount $
Fixed cost	$160,000
Add: Pre-tax income	164,000
Contribution margin	$324,000

$\begin{array}{rcl}\mathrm{Sales}& =& \frac{\mathrm{Contribution}\mathrm{margin}}{\mathrm{Contribution}\mathrm{margin}\mathrm{ratio}}\\ & =& \frac{\$324,000}{0.25}\\ & =& \$1,296,000\end{array}$

Total variable cost

Particular	Amount $
Sales	$1,296,000
Less: Contribution margin	(324,000)
Variable cost	$972,000