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16/09/2018 09:27:58 AM

Target profit

At the break-even point, sales and costs are exactly equal. However, the goal of most companies is to make a profit.

By modifying the break-even equation, the sales required to earn a target or desired amount of profit may be computed. For this purpose, target profit is added to the break-even equation, as shown below.

Sales (units)= (Fixed Costs + Target Proft)/ Unit Contribution Margin

Voltar Company manufactures and sells a telephone answering machine. The Company'scontribution margin income statement for the most recent year is given below:

 

Total

Per Unit

Percent of Sales

Sales (20,000 units)

$1,200,000

$60

100%

Less variable expenses

900,000

45

?%

 

Contribution margin

300,000

$15

?%

Less fixed expenses

240,000

 

 

 

Net operating income

$60,000

 

 

 

 

 

Management is anxious to improve the company's profit performance. Assume that next year management wants the company to earn a minimum profit of $90,000. How many units will have to be sold to meet the target profit figure?

Solution:

Equation Method:

Sales = Variable expenses + Fixed expenses + Profits

$60Q = $45Q + $240,000 + $90,000

$15Q = $3330,000

Q = $3330,000 / $15 Per unit

Q = 22,000 Units

 


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