![]() Question: Finding a target profit in sales dollars The total sales measured in dollars required to achieve a certain profit. Key Equation Target profit in sales dollars = Total fixed costs + Target profit Contribution margin ratio Wow, I’m not sure selling 800 units is realistic, but at least we have a better sense of what needs to be done to make a decent profit. This means we would have to sell 800 units in total to make $30,000 in profit. ![]() Thus we would have to sell an additional 300 units above the break-even point to earn a profit of $30,000. We also know each unit sold above and beyond 500 units contributes $100 toward profit. So if our goal is to make a profit of $30,000 per month (target profit), how many units must be sold? So if we sell 503 units for a month, profit will total $300? It will take 500 units in sales to break even, and each unit sold above 500 results in a $100 increase in profit. Good question! Once all fixed costs are covered for the month, each unit sold contributes $100 toward profit. What happens once we sell enough units to cover all of our fixed costs for the month? If each unit produced and sold provides $100 toward covering fixed costs, and if total monthly fixed costs are $50,000, we would have to sell 500 units to break even-that is, $50,000 divided by $100. Recilia, last week you asked how many units we have to sell to cover our expenses. This answer is confirmed in the following contribution margin income statement. Thus Snowboard Company must produce and sell 500 snowboards to break even. To find the break-even point in units for Snowboard Company, set the profit to zero, insert the unit sales price (S), insert the unit variable cost (V), insert the total fixed costs (F), and solve for the quantity of units produced and sold (Q): Profit = ( S × Q ) − ( V × Q ) − F $0 = $25 0 Q − $15 0 Q − $5 0,000 $0 = $1 00 Q − $5 0,000 $5 0,000 = $1 00 Q Q = 5 00 units Unit variable costs total $150, and total monthly fixed costs are $50,000. Recall that each snowboard sells for $250. Let’s calculate the break-even point in units for Snowboard Company. Once profit is set to zero, fill in the appropriate information for selling price per unit (S), variable cost per unit (V), and total fixed costs (F), and solve for the quantity of units produced and sold (Q). Question: How is the break-even point in units calculated, and what is the break-even point for Snowboard Company?Īnswer: The break-even point in units is found by setting profit to zero using the profit equation. To allow for a mathematical approach to performing CVP analysis, the contribution margin income statement is converted to an equation using the following variables: We use the term “fixed cost” because it describes a cost that is fixed (does not change) in total with changes in volume of activity. We use the term “variable cost” because it describes a cost that varies in total with changes in volume of activity. What is the relationship between the profit equation and the contribution margin income statement?Īnswer: Recall that the contribution margin income statement starts with sales, deducts variable costs to determine the contribution margin, and deducts fixed costs to arrive at profit. This profit equation is used extensively in cost-volume-profit (CVP) analysis, and the information in the profit equation is typically presented in the form of a contribution margin income statement (first introduced in Chapter 5 "How Do Organizations Identify Cost Behavior Patterns?"). shows that profit equals total revenues minus total variable costs and total fixed costs. Question: The profit equation Profit equals total revenues minus total variable costs minus total fixed costs. Perform cost-volume-profit analysis for single-product companies.zip file containing this book to use offline, simply click here. You can browse or download additional books there. More information is available on this project's attribution page.įor more information on the source of this book, or why it is available for free, please see the project's home page. Additionally, per the publisher's request, their name has been removed in some passages. However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Normally, the author and publisher would be credited here. This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This book is licensed under a Creative Commons by-nc-sa 3.0 license.
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