Units and Sales to Earn Target Profit Once firms know their breakeven point, they can figure out how many units that must be sold to earn a target profit. To do that, simply add the target profit to the total fixed costs in the numerator of the breakeven in units or breakeven in sales dollars equations: Breakeven units = (Total fixed costs + Target profit)/(Price - Unit variable cost) Breakeven sales dollars = (Total fixed costs + Target profit)/Contribution margin ratio 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 0.50 0.20 > Unit direct labor Unit variable overhead Unit selling expense Total fixed overhead Total fixed selling and administrative expense Kalman's operating income last year was $ 0.60 $11,000 $20,500 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 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) Contribution margin Total fixed cost $66,000 16,500 $49,500 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