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    The Art of Negotiation


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            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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