EXERCISE 56 Compute the Level of Sales Required to Attain a

EXERCISE 5-6 Compute the Level of Sales Required to Attain a Target Profit [LO5] Liman Corporation has a single product whose selling price is $140 and whose variable expense is S60 per unit. The company\'s monthly fixed expense is $40,000 Required 1. Using the equation method, solve for the unit sales that are required to earn a target profit of $6,000 Using the formula method, solve for the dollar sales that are required to carn a target profit of $8,000 2.

Solution

Equation method:

Let units sold be \"q\"

Sales = Variable Expenses + Fixed Expenses + Profit

140q = 60q + $40,000 + $6,000

80q = $46,000

q = $46,000 / 80 = 575

So the unit sales required for target profit of $6,000 is 575.

Formula Method:

Sales (in dollars) = (Fixed cost + Target Profit) / Contribution Ratio

Contribution Ratio = Contribution / Selling Price = (140 - 60) /140 = 80/140 = 4/7

Sales (in dollars) = (40000 + 8000) / (4/7) = $84,000

So the dollar sales required for target profit of $8,000 is $84,000.

Note: Contribution = Selling price - variable cost