Wize University Managerial Accounting Textbook > Cost-Volume-Profit Analysis
Required Sales for Target Profit
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Required Sales for Target Profit
Company’s do not typically aim to just break-even, and usually set a certain target income they wish to reach.
We can use the same formulas as the break-even point to determine the unit sales or dollar sales to meet a given target income; simply by adding this target income to the fixed cost:
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Example: Required Sales for Target Profit
Karla Garabedian is considering opening a window cleaning business. She estimates that the following costs will be incurred during the first year of operations: Rent, $3,000; depreciation on equipment, $8,500; Wages, $4,250 (wages vary with the number of windows cleaned, estimate is based on 1,000 windows cleaned in the previous year); cleaning supplies, $5 per window cleaned. Karla anticipates that she will charge customers $40 per window cleaned. Her business is subject to a tax rate of 25%.
- How many windows must be cleaned for her to earn an income after tax of $42,000?
- What sales revenue does she need to make to earn an income before tax of $90,000?
Practice: Required Sales for Target Income
ABC Inc produces skateboards and sells them for $60 each. Each skateboard costs $5 in direct materials, $7 in direct labor, and $3 in variable manufacturing overhead. The fixed manufacturing overhead costs a total of $20,000 per month and the company pays a 5% sales commission on each unit sold. There are no other costs. It is estimated that the company will sell 5,000 units this month. The company wishes to earn a net income after tax of $100,000. The company's tax rate is 20%.
Required sales in units (round your answer to zero decimal places)