THE COSTS
TARGET PROFIT

• Financial Information
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• Introduction to Cost Accounting
• Cost definition
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• Standard Costs and Variances
• Cost-Volume-Profit Analysis
• Break-Even Point
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Interesting Articles In the break-even point, sales and costs are exactly the same. Still, the break-even point is not the goal in most of the companies. In contrast, managers of a company seek to maximize profits. Modifying the break-even equation, the volume of sales required to earn an amount desired or expected profit can be estimated. For this purpose, a target profit factor is added to the break-even equation as follows:

 Fixed Costs + Target Profit Sales (units) = ----------------------------------                                                      Contribution margin per unit

To illustrate, assume that fixed costs are estimated at \$ 200,000, and target profit is \$100,000. The sales unit price, variable unit cost, and contribution margin per unit would look like this:

Unit price                         \$75
(-)  Variable unit cost               45
=   Contribution margin of \$ 30 per unit

The sales volume needed to win the targeted profit of \$100,000 are 10,000 units. This is calculated as follows:

 \$200,000 + \$100,000 Sales (units)  =  ----------------------------------  =  10,000 units                                                            \$30

The following income statement confirms the above:

 Sales (10,000 units X \$75) \$750,000 (-) Variable Costs (10,000 X \$45) 450,000 Contribution margin (10,000 X \$30) \$300,000 (-) Fixed Costs 200,000 Operational Income \$100,000

ACCOUNTING FORUM

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