This preview shows pages 1–2. Sign up to view the full content.
Supplementary Notes re Chapter 6:
CostVolume Profit
Cost/Volume/Profit
Analysis
1
.
Sales Required to Earn a Target Income
Most businesses are not interested in simply breaking eventhey want to earn a “target” income and
wish to know what level of sales would be required to earn the target income.
This can be done by
slightly modifying the formulas or equations.
CM formula Method
:
Target Sales in units
=
TFC
+
Target Income
CM per unit
Target Sales in $
=
TFC
+
Target Income
CM%
Equation Method:
S

TVC
 TFC
=
Target NI
State TVC in terms of a % of S
and solve for S
or,
SP(x)
 VC/unit(x)

TFC
=
Target NI
Solve for x
You can use this second equation to also solve for SP, VC/unit, or TFC provided you are given all the
other parameters.
Example E57 part (c)
2.
Margin of Safety (MS)
The margin of safety indicates the sales cushion you have in sales $
before you reach the BE pt.
It is calculated as follows:
MS
=
Actual Sales

Breakeven pt. Sales
It can also be stated as a %, called the MS %
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
 Winter '12
 Farrar

Click to edit the document details