ACCA PM Syllabus C. Decision-making Techniques - Single and Multi-Product Situations: Target Profit or Revenue - Notes ^{4 / 6}

Target Profit or Revenue

How many units must be sold to earn a target profit or revenue of an $x amount? 

The sales volume necessary in order to achieve this profit can be ascertained using any of the three methods outlined above

• The equation method

  Total revenue – total variable costs – total fixed costs = Target Profit/Revenue

• The contribution margin method

  The contribution margin (contribution per unit) = 

  BEP in units = 

  Fixed Costs + Target Profit / Revenue
  --------------------------------------                
  Contribution per unit

  In a multi-product situation, 

  Required Revenue = 

  Fixed Costs + Target Profit / Revenue
  -------------------------------------
  Average C/S Ratio

• The graphical method

  The answer can also be read from the graph.  The gap between the total revenue and total cost line represents profit (after the break even point) or loss (before the break even point).

Illustration

ABC Ltd has provided us with the following information: -

Selling price per unit  $100
Variable costs per unit $60
Fixed Costs $250,000 per annum

ABC Ltd. wants to achieve a target profit of $400,000.

Calculate the number of units which the company should produce and sell next year in order to achieve the target level of profit.

Equation Method

OR

Contribution Margin Method