Chapter 5 Part 3: Target Profit Analysis Flashcards

Questions and Answers

What is Target Profit Analysis used for?

To estimate what sales volume is needed to achieve a target profit (correct)

To determine the net operating income

To assess sales performance

To calculate the break-even point

What are the two methods used in Target Profit Analysis?

Equation Method and Formula Method

What is the formula for the Equation Method?

Profit = Unit CM x Q - Fixed Expenses

What is the Formula Method for calculating Unit Sales to Obtain the Target Profit?

(Target Profit + Fixed Expenses) / Unit Contribution Margin Signup and view all the answers

What does Dollar Sales to Attain Target Profit equal?

(Target Profit + Fixed Expenses) / Contribution Margin Ratio Signup and view all the answers

What is Margin of Safety?

The excess of budgeted or actual sales dollars over the break-even volume of sales dollars. Signup and view all the answers

How do you calculate Margin of Safety?

Total Sales - Break-even Sales Signup and view all the answers

What is the formula for Margin of Safety Percentage?

Margin of Safety in Dollars / Total Sales in Dollars Signup and view all the answers

In single-product companies, how do you calculate Margin of Safety in # of Units?

Margin of Safety in $ / Selling Price Signup and view all the answers

What is Operating Leverage?

A measure of how sensitive net operating income is to a given percentage change in dollar sales. Signup and view all the answers

What is the formula for Degree of Operating Leverage?

Contribution Margin / Net Operating Income Signup and view all the answers

What does Sales Mix refer to?

The relative proportions in which a company's products are sold. Signup and view all the answers

Study Notes

Target Profit Analysis

Estimates necessary sales volume to achieve a desired profit.
Utilizes two methods: Equation Method and Formula Method.

Equation Method

Based on the formula used in break-even analysis:
- Profit = Unit Contribution Margin (CM) x Quantity (Q) - Fixed Expenses.

Formula Method

To calculate unit sales required for target profit:
- Unit Sales to Obtain the Target Profit = (Target Profit + Fixed Expenses) / Unit Contribution Margin.

Dollar Sales for Target Profit

Determines dollar sales needed to reach a target profit:
- Dollar Sales to Attain Target Profit = (Target Profit + Fixed Expenses) / Contribution Margin Ratio.

Margin of Safety

Represents the excess of budgeted or actual sales over break-even sales.
Indicates risk level regarding incurred expenses.

Calculating Margin of Safety

Formula:
- Margin of Safety = Total Sales - Break-even Sales.

Margin of Safety Percentage

Indicates the proportion of sales above break-even:
- Margin of Safety Percentage = Margin of Safety in Dollars / Total Sales in Dollars.

Margin of Safety in Units

For single-product companies, calculate units using:
- Margin of Safety in # of Units = Margin of Safety in $ / Selling Price.

Operating Leverage

Reflects sensitivity of net operating income to percentage changes in dollar sales.
Acts as a multiplier affecting profit variability.

Degree of Operating Leverage

Calculated as:
- Degree of Operating Leverage = Contribution Margin / Net Operating Income.

Sales Mix

Refers to the relative proportions of a company's various products sold.

Description

Explore the key concepts of Target Profit Analysis with these flashcards. This quiz covers essential methods such as the Equation Method and the Formula Method used to determine the necessary sales volume to achieve a target profit. Perfect for students looking to deepen their understanding of profit analysis.