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Example: Kalman Company makes vases. Last year, Kalman sold 5,000 vases at a price of $12 and had the following information on costs: Unit direct
Example: Kalman Company makes vases. Last year, Kalman sold 5,000 vases at a price of $12 and had the following information on costs: Unit direct materials $1.70 Unit direct labor 0.50 Unit variable overhead 0.20 0.60 Unit selling expense Total fixed overhead Total fixed selling and administrative expense $11,000 $20,500 Kalman's operating income last year was $ Suppose Kalman wants to earn operating income of $18,000. How many units (rounded to the nearest unit) must be sold to achieve that? Units = (Total fixed cost + Target income)/(Price - Unit variable cost) = ($31,500 + $18,000)/($12 - $3) = 5,500 What level of sales revenue would result in operating income of $18,000? We can show that selling 5,500 units results in operating income of $18,000 by constructing an income statement. Sales ($12 x 5,500) Total variable cost ($3 x 5,500) $66,000 16,500 Contribution margin $49,500 Total fixed cost 31,500 Operating income $18,000 If Kalman wanted to earn operating income of $21,000 rather than $18,000, the necessary number of units sold would be If Kalman's contribution margin ratio were 40%, the sales dollars to earn $18,000 in operating income would be higher Tower Units and Sales to Earn After-Tax Target Profit the same When looking for the number of units, or amount of sales dollars to earn a target profit, we have been talking about before-tax profit. If a company wants to determine the units or sales dollars to earn an after-tax target profit, that profit must be rantated into before tastar This inclos...totas atrod tatar before tasoft ist after ta fiti notast af te bredaran
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