Target Profit and Revenue
The Business and Management syllabus requires that you calculate a required output level for a given target profit or level of revenue; in other words how many units of a product a firm needs to sell to make a certain level of profit. This can be worked out manually using a break-even chart, but this is not required and indeed, using a formula is significantly quicker.
Let's assume that Armornet wishes to make a profit of $320 000, then what quantity must they sell of their cases?
The formula used to calculate target profit is an adaption of the break-even formula:
The logic of this formula is quite simple. We know the formula for BEQ:
So if the break-even quantity is 800 units, all the fixed costs are paid off at that point. Therefore, any contribution becomes equivalent to profit, since all variable costs have also been paid to calculate the contribution (profit - variable cost). In essence the equation is calculating the number of units above break-even that is required to meet the target profit.
If we want to know how many units Armornet need to sell to make a profit of $320 000, we use the figures provided for Armornet, to calculate the answer:
The margin of safety is, therefore, 400 units.
Let us consider this solution another way; we know that the BEQ was 800 units. Every unit above that contributes another $800. However, since fixed costs have now been paid in full, that $800 per unit is pure profit. Consequently, another 400 units sold will provide the $320,000 target profit.