Chapter 05s-1

# Target profit analysis suppose rbcs management wants

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Target Profit Analysis Suppose RBC’s management wants to know how many bikes must be sold to earn a target profit of \$100,000. Profit  =  Unit CM  ×  Q – Fixed expenses \$100,000  =  \$200  ×   Q  – \$80,000 \$200  ×   Q   =  \$100,000 – \$80,000 Q   =  (\$100,000 + \$80,000)  ÷  \$200 Q   =  900

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5-31 The Formula Method The formula uses the following equation. Target profit + Fixed expenses CM per unit = Unit sales to attain the target profit
5-32 Target Profit Analysis in Terms of Unit Sales Suppose Racing Bicycle Company wants to know how many bikes must be sold to earn a profit of \$100,000. Target profit + Fixed expenses CM per unit = Unit sales to attain the target profit Unit sales =   900 \$100,000 + \$80,000 \$200 Unit sales =

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5-33 Target Profit Analysis We can also compute the target profit in terms of  sales dollars using either the equation method or  the formula method. Equation Method Formula Method OR
5-34 Equation Method Profit  =  CM ratio  ×  Sales – Fixed expenses Our goal is to solve for the unknown “Sales,” which represents the dollar amount of sales that must be sold to attain the target profit. Suppose RBC management wants to know the  sales volume that must be generated to earn a  target profit of \$100,000. \$100,000  =  40%  ×  Sales – \$80,000 40%  ×  Sales = \$100,000 + \$80,000 Sales = (\$100,000 + \$80,000)  ÷  40% Sales =  \$450,000

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5-35 Formula Method We can calculate the dollar sales needed to attain a target profit (net operating profit) of \$100,000 at Racing Bicycle. Target profit + Fixed expenses CM ratio = Dollar sales to attain the target profit Dollar sales =   \$450,000 \$100,000 + \$80,000 40% Dollar sales =
5-36 Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is \$1.49 and the average variable expense per cup is \$0.36. The average fixed expense per month is \$1,300. Use the formula method to determine how many cups of coffee would have to be sold to attain target profits of \$2,500 per month. a. 3,363 cups b. 2,212 cups c. 1,150 cups d. 4,200 cups

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5-37 Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is \$1.49 and the average variable expense per cup is \$0.36. The average fixed expense per month is \$1,300. Use the formula method to determine the sales dollars that must be generated to attain target profits of \$2,500 per month. a. \$2,550 b. \$5,013 c. \$8,458 d. \$10,555
5-38 Break-even Analysis The equation and formula methods can be used to  determine the unit sales and dollar sales needed to  achieve a target profit of zero. Let’s use the RBC  information to complete the break-even analysis. Total Per Unit CM Ratio Sales (500 bicycles) 250,000 \$ 500 \$ 100% Less: Variable expenses 150,000 300 60% Contribution margin 100,000 200 \$ 40% Less: Fixed expenses 80,000 Net operating income 20,000 \$ Racing Bicycle Company Contribution Income Statement For the Month of June

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5-39 Break-even in Unit Sales: Equation Method \$0  =  \$200  ×  Q  +  \$80,000 Profits  =  Unit CM  ×  Q – Fixed expenses
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