APPLY THE CONCEPTS: Target income (sales revenue) Another useful method for figuring out the type of performance your company will need to reach a target income is by using sales revenue. Rather than using the number of units, this method uses total sales revenue. In companies for which the total set of goods produced and sold is more varied, this would be the preferred method, as opposed to a business in which only one product is sold. Assume a company has pricing and cost information as follows: Price and Cost Information Amount Selling Price per Unit $30 Variable Cost per Unit $15 Total Fixed Cost $15,000 For the upcoming period, the company wishes to generate operating income of $40,000. Given the cost and pricing structure for the company’s product, how much sales revenue must it generate to attain its target income?
APPLY THE CONCEPTS: Target income (sales revenue)
Another useful method for figuring out the type of performance your company will need to reach a target income is by using sales revenue. Rather than using the number of units, this method uses total sales revenue. In companies for which the total set of goods produced and sold is more varied, this would be the preferred method, as opposed to a business in which only one product is sold. Assume a company has pricing and cost information as follows:
| Price and Cost Information | Amount | |
| Selling Price per Unit | $30 | |
| Variable Cost per Unit | $15 | |
| Total Fixed Cost | $15,000 |
For the upcoming period, the company wishes to generate operating income of $40,000. Given the cost and pricing structure for the company’s product, how much sales revenue must it generate to attain its target income?
Step 1: Calculate the contribution margin ratio:
The contribution margin ratio is the contribution margin in proportion to the selling price on a per-unit basis.
Contribution Margin Ratio = |
(Selling Price – Variable Cost) |
| Selling Price |
Note: The contribution margin ratio is calculated to one decimal place.)
Contribution Margin Ratio = |
($fill in the blank 963b25031011fa8_1 – $15) | = |
fill in the blank 963b25031011fa8_2 |
| $fill in the blank 963b25031011fa8_3 |
Step 2: Calculate the sales revenue required to attain the target income:
Sales Dollars = |
(Target Income + Fixed Cost) |
| Contribution Margin Ratio |
Sales Dollars = |
( $fill in the blank 963b25031011fa8_4 + $15,000) | = |
$fill in the blank 963b25031011fa8_5 |
| fill in the blank 963b25031011fa8_6 |
Step 3: Create a contribution margin income statement, to check your previous work. Enter all amounts as positive numbers.
| Sales | $fill in the blank 963b25031011fa8_7 | |
| Total variable expense | fill in the blank 963b25031011fa8_8 | |
| Total contribution margin | fill in the blank 963b25031011fa8_9 | |
| Total fixed expense | fill in the blank 963b25031011fa8_10 | |
| Operating income | fill in the blank 963b25031011fa8_11 |
APPLY THE CONCEPTS: Margin of Safety
Margin of safety can allow you to see how much padding there is for your company between
| Price and Cost Information | Amount | |
| Selling Price per Unit | $450 | |
| Variable Cost per Unit | $400 | |
| Total Fixed Cost | $70,000 |
For the upcoming period, the company projects that it will sell 2,000 units. Considering that the company has a unit break-even point of 1,400 units, what is the margin of safety in terms of both units and sales revenue? Round your answers to two decimal places, if necessary.
| Margin of Safety in Units = fill in the blank 75dcf4fd0010006_1 - fill in the blank 75dcf4fd0010006_2 = fill in the blank 75dcf4fd0010006_3 |
| Margin of Safety in Sales Revenue = $fill in the blank 75dcf4fd0010006_4 - $fill in the blank 75dcf4fd0010006_5 = $fill in the blank 75dcf4fd0010006_6 |
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