Company A wants to earn 5,000 profit in the month of...

Company A wants to earn $5,000 profit in the month of January. If their fixed costs are $10,000 and their product has a per-unit contribution margin of $250, how many units must they sell to reach their target income?
A. 20
B. 40
C. 60
D. 120

Key Concepts

Fixed Costs

Fixed costs are expenses that remain constant regardless of the level of production or sales. They must be covered for the business to start generating a profit. In cost-volume-profit analysis, fixed costs are a key component in determining the break-even point or the number of units required to achieve a target profit.

Contribution Margin

The contribution margin is the amount by which the revenue from selling one unit exceeds the variable cost per unit. It represents the portion of sales that contributes to covering fixed costs and, after those are covered, to generating profit. Knowing the per-unit contribution margin allows businesses to calculate how many units need to be sold to reach their financial goals.

Target Profit

Target profit is the desired amount of profit a business aims to earn over a specific period. It adds to the fixed costs in determining the total amount that must be generated by covering fixed expenses and achieving the profit goal. This concept is fundamental in planning and decision-making, as it helps in setting sales targets and pricing strategies.

Profit Equation

The profit equation in cost-volume-profit analysis states that Profit = (Contribution Margin per Unit x Number of Units Sold) - Fixed Costs. This equation is used to determine how many units need to be sold to achieve a given profit target by rearranging it to include target profit in the calculation. It's an essential tool in financial planning and operational decision-making.

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