This answer results from using 70% of the selling price as the variable costs and 30% of the selling price as the contribution margin ratio per unit instead of 30% of the selling price for the variable costs and 70% of the selling price for the contribution margin ratio per unit.
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This answer results from using the desired after-tax return on investment in the formula to calculate the required sales. The after-tax return needs to be converted to its before-tax equivalent before it is used in the formula, because the sales revenue required is a before-tax amount.
The question asks for the amount of sales required to earn an 8% after-tax return on the investment of $300,000. The first step is to calculate what the desired after-tax amount is. That is 8% of $300,000, which is $24,000. The next step is to convert this after-tax amount to its before-tax equivalent. We do that by dividing it by 1 – the tax rate. Since the tax rate is 40%, 1 – the tax rate is 60%, or .60. Dividing $24,000 by .60, we get $40,000 of before-tax net income that is required. We now set up an equation, letting X = the dollars of sales. If X = the dollars of sales, then .3X = the variable costs. X ? .3X – 600,000 = 40,000 .7X = 640,000 X = $914,286
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