Final answer:
Cost-volume-profit analysis is used by companies to determine required sales to achieve a specific net operating income. It involves understanding the relationships between cost, volume, and profit, and includes calculations of total revenue, which is price per unit multiplied by quantity sold.
Step-by-step explanation:
When a company has a specific net operating income it wishes to achieve, determining required sales to achieve this specific income is done by using cost-volume-profit analysis. This approach helps businesses to understand the relationships between cost, volume, and profit, which is vital for making informed financial decisions. The formula for total revenue, which is the starting point of this analysis, is calculated by multiplying the selling price of the product by the quantity of units sold. This can be expressed as:
Total Revenue = Price per Unit × Quantity Sold
Cost-volume-profit analysis takes into account not only the total revenue but also the fixed costs, variable costs, and the sales price per unit. The break-even point is particularly important in this analysis; it's the point where total revenue equals total expenses, resulting in a net operating income of zero. By using this analysis, companies can determine the amount of revenue required to cover all costs and achieve a desired net operating income. Additionally, it helps in strategic planning, as it provides insight into how changes in cost and volume can impact the bottom line, allowing for more effective price-setting, cost control, and sales targets.