Reference no: EM131787113
Units and Sales to Earn Target Profit
Once firms know their breakeven point, they can figure out how many units must be sold to earn a target profit. To do that, simply add the target profit to the total fixed costs in the numerator of the breakeven in units or breakeven in sales dollars equations:
| Breakeven units = (Total fixed costs + Target profit)/(Price - Unit variable cost) |
| Breakeven sales dollars = (Total fixed costs + Target profit)/Contribution margin ratio |
Example: Kalman Company makes vases. Last year, Kalman sold 5,500 vases at a price of $12.09 and had the following information on costs:
| Unit direct materials |
$1.69 |
| Unit direct labor |
0.53 |
| Unit variable overhead |
0.25 |
| Unit selling expense |
0.62 |
| Total fixed overhead |
$12,155 |
| Total selling and administrative expense |
$22,605 |
Kalman's operating income last year was _________________ .
Suppose Kalman wants to earn operating income of $17,440. How many units (rounded to the nearest unit) must be sold to achieve that?
| Units = (Total fixed cost + Target income)/(Price - Unit variable cost) = ($34,760 + $17,440)/($12.09 - $3.09) = 5,800 |
What level of sales revenue would result in operating income of $17,440? _________________ .
We can show that selling 5,800 units results in operating income of $17,440 by constructing an income statement.
| Sales ($12.09 × 5,800) |
$70,122 |
| Total variable cost ($3.09 × 5,800) |
17,922 |
| Contribution margin |
$52,200 |
| Total fixed cost |
34,760 |
| Operating income |
$17,440 |
If Kalman wanted to earn operating income of $20,990 rather than $17,440, the necessary number of units sold would be _________________.
If Kalman's contribution margin ratio were 40%, the sales dollars to earn $17,440 in operating income would be _________________.