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

Question

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 . 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? . 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 . If Kalman's contribution margin ratio were 40%, the sales dollars to earn $19,877 in operating income would be .

Explanation / Answer

By back calculation, we shall find the answer to this query

Total gross profit at 22897 operating margin requirement

GP = 22897 + Fixed Cost = 22897 + 37583 = 60480

Now, the contribution margin is 40 %

So, 40 % of otal revenue = 60480

Total revenue = 60480 /0.40 = 151200

Now, total revenue = no of units * selling price =

151200 = No of units * 11.89

No of units = 12716 units

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