Tom company has sales of Rs.200,000/- with variable expenses of Rs.150,000/-, fixed expenses of Rs.60,000/-, and an operating loss of Rs.10,000/-. By how much would Tom have to increase its sales in order to achieve an operating income of 10% of sales?
To find out how much Tom would have to increase its sales in order to achieve an operating income of 10% of sales, we need to calculate the target operating income and then determine the increase in sales required.
Step 1: Calculate the target operating income
First, we need to find the target operating income. Since the target is 10% of sales, we can calculate it as follows:
Target operating income = 10% of sales = 10/100 * Rs.200,000 = Rs.20,000
So, the target operating income is Rs.20,000.
Step 2: Calculate the current operating income
To calculate the current operating income, we need to subtract the total expenses from the sales. The formula is:
Operating income = Sales - Total expenses
Given data:
Sales = Rs.200,000
Variable expenses = Rs.150,000
Fixed expenses = Rs.60,000
Operating loss = Rs.10,000
Operating income = Rs.200,000 - (Rs.150,000 + Rs.60,000) = Rs.200,000 - Rs.210,000 = -Rs.10,000
From the given data, we can see that the current operating income is a loss of Rs.10,000.
Step 3: Calculate the increase in sales required
To find the increase in sales required, we need to subtract the current operating income from the target operating income. The formula is:
Increase in sales required = (Target operating income - Current operating income) / Operating income ratio
In this case, the operating income ratio is 10%, or 0.1.
Increase in sales required = (Rs.20,000 - (-Rs.10,000)) / 0.1 = (Rs.20,000 + Rs.10,000) / 0.1 = Rs.30,000 / 0.1 = Rs.300,000
Therefore, Tom would need to increase its sales by Rs.300,000 in order to achieve an operating income of 10% of sales.