Operations management

Table of Contents

1. Topic pack - Operations management - introduction
2. Operations Management (OM) - Introduction
3. 5.1 Production methods notes
4. 5.1 Production methods - questions
5. 5.2 Costs and revenues - notes
6. 5.2 Costs and revenues - questions
7. 5.3 Break-even analysis - notes
   1. Break-even analysis
   2. Amazon.com
   3. Break-even analysis - calculation
   4. Building a break-even chart
   5. Drawing a break-even diagram
   6. Completing a break-even chart
   7. Margin of safety
   8. Margin of safety - example
   9. Break-Even: Worked example
   10. Changes in break even
   11. Target Profit and Revenue
   12. Examples - break-even analysis (1)
   13. Examples - break-even analysis (2)
   14. Limitations of break-even analysis
8. 5.3 Break-even analysis - questions
9. 5.3 Break-even analysis - simulations and activities
10. 5.4 Quality assurance - notes
11. 5.4 Quality assurance - questions and activities
12. 5.5 Location - notes
13. Innovation - notes (HL only)
14. 5.6 Innovation - questions
15. 5.7 Production planning - notes
16. 5.7 Production planning - questions
17. 5.8 Project management - notes (HL only)
18. 5.8 Project management - questions (HL only)
19. Print View

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.