Target income calculations, Cost Accounting

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Target Income Calculations

Breaking even is not the bad thing, but surely not a satisfactory outcome for most businesses. In its place, a manager might be more interested in learning the essential sales level to achieve the aimed profit.

The idea/logic for solving this difficulty is to treat "aimed income" like an added increment of the fixed/not varying costs. Or we can say, the margin must cover the fixed costs and the desired profit:

Target Income results when the:

Sales = Total Variable Costs + Total Fixed Costs + Target Income

Suppose that Leyland wants to know the level of the sales to reach the $600,000 income: (Units X $2,000) = (Units X $800) + $1,200,000 + $600,000

By further Solving:

Step a: (Units X $2,000) = (Units X $800) + $1,200,000 + $600,000

Step b: (Units X $1,200) = $1,800,000

Step c: Units = 1,500

Once more, it is possible to "jump to the step b" by splitting the fixed costs and aimed income by the per unit contribution margin:

Units to Achieve the Target Income

=

(Total Fixed Costs + Target Income) / Contribution Margin Per Unit

1,500 Units = $1,800,000 / $1,200

If in case you want to know the dollar level of the sales to achieve particular target net income: Sales to achieve a aimed Income

=

(Total Fixed Costs + Target Income) / Contribution Margin Ratio

$3,000,000 = $1,800,000 / 0.60


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