A company requires $1305600 in sales to meet its operating income target. Its contribution margin is 30%, and fixed costs are $230400. What is the target operating income?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
A company requires $1305600 in sales to meet its operating income target. Its contribution margin is 30%, and fixed costs are $230400. What is the target operating income?
Sales revenue: It is the revenue earned by a business on selling the goods or providing services to the general public.
Variable costs: These costs are incurred in conjunction to the volume of goods produced or sold. It indicates that these costs are incurred only when the goods are produced or sold.
Contribution margin: It is the surplus achieved by a business after meeting all the variable costs from the sales revenue. It is nothing but the excess of sales revenue over the variable costs incurred for such sale.
Fixed costs: These are costs which are incurred irrespective of the production or sale activities. It indicates that these costs are only incurred once and will not change with the change in the volume of goods produced or sold. These costs are constant in total but changes per unit. If the number of units produced is increasing, the fixed cost per unit will decrease and vice-versa.
Contribution format income statement: In this income statement, all the variable and fixed expenses related to a business are shown separately. The variable expenses are deducted from the revenues to calculate the contribution margin and from all the fixed expenses are deduced from the contribution margin to calculate the operating income.
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