Units and Sales to Earn Target Profit Once firms know their breakeven point, the

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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:

Example: Kalman Company makes vases. Last year, Kalman sold 5,900 vases at a price of $11.89 and had the following information on costs:

Kalman's operating income last year was - Select your answer -$0$10,603$14,573$27,848$38,881Item 1 .

Suppose Kalman wants to earn operating income of $19,877. How many units (rounded to the nearest unit) must be sold to achieve that?

What level of sales revenue would result in operating income of $19,877? - Select your answer -$6,500$37,583$49,983$77,285Item 2 .

We can show that selling 6,500 units results in operating income of $19,877 by constructing an income statement.

If Kalman wanted to earn operating income of $22,897 rather than $19,877, the necessary number of units sold would be - Select your answer -higher lower the same Item 3 .

If Kalman's contribution margin ratio were 40%, the sales dollars to earn $19,877 in operating income would be - Select your answer -higher lower the same Item 4 .

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 5,900 vases at a price of $11.89 and had the following information on costs:

Unit direct materials $1.74 Unit direct labor 0.47 Unit variable overhead 0.20 Unit selling expense 0.64 Total fixed overhead $13,275 Total selling and administrative expense $24,308

Kalman's operating income last year was - Select your answer -$0$10,603$14,573$27,848$38,881Item 1 .

Suppose Kalman wants to earn operating income of $19,877. How many units (rounded to the nearest unit) must be sold to achieve that?

Units = (Total fixed cost + Target income)/(Price - Unit variable cost) = ($37,583 + $19,877)/($11.89 - $3.05) = 6,500

What level of sales revenue would result in operating income of $19,877? - Select your answer -$6,500$37,583$49,983$77,285Item 2 .

We can show that selling 6,500 units results in operating income of $19,877 by constructing an income statement.

Sales ($11.89 × 6,500) $77,285 Total variable cost ($3.05 × 6,500) 19,825 Contribution margin $57,460 Total fixed cost 37,583 Operating income $19,877

If Kalman wanted to earn operating income of $22,897 rather than $19,877, the necessary number of units sold would be - Select your answer -higher lower the same Item 3 .

If Kalman's contribution margin ratio were 40%, the sales dollars to earn $19,877 in operating income would be - Select your answer -higher lower the same Item 4 .

Explanation / Answer

Units = (Total fixed cost + Target income)/(Price - Unit variable cost) = ($37,583 + $22,897)/($11.89 - $3.05) = 6,842

Sales= (Total fixed cost + Target income)/Contribution Margin= ($37,583 + $19,877)/40%=$143650

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