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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Target profit

Ramirez Inc. sells a product for $80 per unit. The variable cost is $60 per unit, and fixed costs are $2,000,000. Determine (a) the break-even point in sales units and (b) the break-even point in sales units if the company desires a target profit of $250,000.

(a)

To determine

Target Profit: It refers to the desired amount of profit that a company expects to achieve by the end of an accounting period after it reaches its break-even point. Thus, the company needs to compute the required sales to earn the target profit. The formula to calculate the required sales to earn the target profit is as follows:

Sales(units) =FixedCosts+TargetProfitUnitContributionMargin

To determine: the break-even point in sales units.

Explanation

Determine the break-even point in sales units.

Fixed cost =$2,000,000

Contribution margin per unit =$20 per unit (1)

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit=$2,000,000$20=100,000units

Working note:

Determine the contribution margin per unit

(b)

To determine
the break-even point if the company desires a target profit of $250,000.

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