Assignment Exercise 18-3 (p. 565) Target Operating Income ✓ Solved
Assignment Exercise 18-3 (p. 565) Target Operating Income Create
The general idea of this question is this: A company wants to make $100,000. This is what is referred to as their "target operating income". They have a product that sells for $80. The variable cost per item is $60, so every time they make an item it costs them $60. Their total fixed cost is $60,000, so, no matter how many items they make, they will have $60,000 in expenses.
There are two types of dollar amounts mentioned in the assumptions above: overall dollar amounts and per item costs. The per item costs show that each unit of the item sells for $80 but costs $60 to produce. The difference between these two numbers is known as the 'contribution margin' per unit. This margin is the amount of money that contributes to the operating income each time an item is sold.
The assignment asks you to determine the required revenue (per unit sales price multiplied by volume of items sold) to achieve the desired operating income. According to the formula for Target Operating Income Using the Contribution Margin Method: N = (fixed costs + target operating income) / (contribution margin per unit). By plugging in the identified numbers from the information provided, you will determine the number of units ("N") that must be sold in order to achieve an operating income of $100,000. You will use this value of "N" to show your work by creating a table that summarizes the calculations.
Paper For Above Instructions
To achieve the target operating income of $100,000, we must first calculate the necessary number of units to sell, following the outlined formula. Given the details provided, we can define the input values:
- Fixed Costs (FC) = $60,000
- Target Operating Income (TOI) = $100,000
- Selling Price per Unit (SP) = $80
- Variable Cost per Unit (VC) = $60
Now, we calculate the contribution margin per unit:
Contribution Margin (CM) = Selling Price - Variable Cost
CM = $80 - $60 = $20
Next, to find the number of units ("N") required to cover both fixed costs and achieve the target operating income:
N = (Fixed Costs + Target Operating Income) / Contribution Margin
N = ($60,000 + $100,000) / $20
N = $160,000 / $20
N = 8,000 units
Thus, the company needs to sell 8,000 units to achieve the target operating income of $100,000. To summarize these calculations, we will create a table showing Fixed Costs, Total Contribution, and Number of Units Sold:
| Description | Amount |
|---|---|
| Fixed Costs | $60,000 |
| Target Operating Income | $100,000 |
| Total Required Contribution Margin | $160,000 |
| Contribution Margin per Unit | $20 |
| Required Number of Units (N) | 8,000 |
The table clearly shows how the calculations are structured and helps in visualizing the requirements to meet the financial target. By selling 8,000 units, the company can achieve the specified operating income.
This method ensures that the company remains on track with managing its costs while also focusing on revenue generation. Understanding these core concepts not only assists in making informed decisions regarding pricing and cost management but also plays a pivotal role in overall business strategy.
References
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