Chapter 5 Part 3: Target Profit Analysis Flashcards

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.