# Exercise-1 (Target profit analysis, break-even point)

PNG electric company manufactures a number of electric products. Rechargeable light is one of the PNG’s products that sells for $180/unit. Total fixed expenses related to rechargeable electric light are $270,000 per month and variable expenses involved in manufacturing this product are $126 per unit. Monthly sales are 8,000 rechargeable lights.

**Required:**

- Compute break-even point of the company in dollars and units.
- According to a research conducted by sales department, a 10% reduction in sales price will result in 25% increase in unit sale. Prepare two income statements in contribution margin format, one using the current price and one using proposed price (10% below the old sales price).
- Compute the number of rechargeable lights to be sold to earn a net operating income of $189,000 per month (use original data).

## Solution:

#### (1) Computation of break-even point:

**a. Break even point in units:**

Break even point in units can be computed by using either equation method or contribution margin method. Both the methods are given below:

*Equation method:*

Sales = Variable expenses + Fixed expenses

$180Q = $126Q + 270,000

$180Q – $126Q = $270,000

$54Q = $270,000

Q = $270,000/$54

Q = 5,000 Units

*Contribution margin method:*

Break even point = Fixed expenses/Contribution margin per unit

270,000 / 54*

= 5,000 units

*$180 – $126

**b. Break-even point in dollars:**

Break-even point in dollars can be computed by multiplying break-even point in units by sales price per unit as shown below:

5,000 units × $180

=$900,000

#### (2) Income statements:

**a. Income statement under current operations:**

**b. Income statement under proposed operations:**

The proposal should not be accepted because it will reduce the contribution margin from $54 per unit to $36 per unit and net operating income from $162,000 to $90,000.

#### (3) Target profit analysis:

**a. Equation method:**

Sales = Variable expenses + Fixed expenses + Profit

$180Q = $126Q + 270,000 + $189,000

$180Q – $126Q = $459,000

$54Q = $459,000

Q = $459,000 / $54

Q = 8,500 Units

**b. Contribution margin method:**

(Fixed expenses + Target income)/Contribution margin per unit

= ($270,000+$189,000)/54

= 8,500 units

On the basis of original data, company needs to sell 8,500 rechargeable lights to earn a profit of $189,000.

## 10 Comments on Exercise-1 (Target profit analysis, break-even point)

Yes,I am very much helped in your detail explanation.

Third question: “Compute the number of rechargeable lights to be sold to earn a net operating income of $144,000 per month.” Answer given for 72.000, should be 11500 units.

3ed quastion i think the answ0er shuld be like this 144000+270000/cm(54)=7666 units

$270000+$189000/cm(54)=8500 units

can i have more explaine about the target profit analysis

@Razaz

http://www.accountingformanagement.org/target-profit-analysis/

she doen’t like me to control her life as well as i can’t control of the sale arise or goes down. so learning this formula make realize that how to make balance between love and sale.

Sale of 8,000 units @ 8

Prime cost 3 Rs.

Variable Overheads @ 1 Rs

Fixed cost 1,00,000 Rs.

Calculate BEP and MOP..??

Income statement under proposed operations:

Can anyone explain how did we get 10,000 unit price and 162 per unit?

Under proposed operations, we assume that the sale price will reduce by 10% and the number of units sold will increase by 25%.

Number of units sold under proposed operations:

8,000 + (8,000 x 25%) = 10,000 units

Sale price under proposed operations:

180 – (180 x 10%) = $162