Target profit Company A wants to achieve a target profit of $300,000. The sales volume necessary in order to achieve this profit can be ascertained using any of the three methods outlined above. If the equation method is used, the profit of $300,000 is put into the equation rather than the profit of $O: (500) (300) 200,000 = 300,000 200 - 200,000 = 300,000 20Q = 500,000 Q = 25,000 units. Alternatively, the contribution method can be used: UCM = 20, FC = 200,000 and P= 300,000. Q = FC +P UCM Q = 200,000 + 300,000 20 Margin of safety Therefore, Q = 25,000 units. The margin of safety indicates by how much sales can decrease before a loss occurs - ie it is the excess of budgeted revenues over break-even revenues. Using Company A as an example, let's assume that budgeted sales are 20,000 units. The margin of safety can be found, in units, as follows: Budgeted sales - break-even sales = 20,000 - 10,000 = 10,000 units. Alternatively, as is often the case, it may be calculated as a percentage: (Budgeted sales - break-even sales)/budgeted sales In Company A's case, it will be (10,000/20,000) x 100 = 50%. Finally, it could be calculated in terms of $ sales revenue as follows: (Budgeted sales - break-even sales) x selling price = 10,000 x $50 = $500,000. Target profit Company A wants to achieve a target profit of $300,000. The sales volume necessary in order to achieve this profit can be ascertained using any of the three methods outlined above. If the equation method is used, the profit of $300,000 is put into the equation rather than the profit of $O: (500) (300) 200,000 = 300,000 200 - 200,000 = 300,000 20Q = 500,000 Q = 25,000 units. Alternatively, the contribution method can be used: UCM = 20, FC = 200,000 and P= 300,000. Q = FC +P UCM Q = 200,000 + 300,000 20 Margin of safety Therefore, Q = 25,000 units. The margin of safety indicates by how much sales can decrease before a loss occurs - ie it is the excess of budgeted revenues over break-even revenues. Using Company A as an example, let's assume that budgeted sales are 20,000 units. The margin of safety can be found, in units, as follows: Budgeted sales - break-even sales = 20,000 - 10,000 = 10,000 units. Alternatively, as is often the case, it may be calculated as a percentage: (Budgeted sales - break-even sales)/budgeted sales In Company A's case, it will be (10,000/20,000) x 100 = 50%. Finally, it could be calculated in terms of $ sales revenue as follows: (Budgeted sales - break-even sales) x selling price = 10,000 x $50 = $500,000