Final answer:
To calculate the amount of sales dollars needed to reach a target profit, one must use the formula: Sales Dollars = (Fixed Costs + Target Profit) / Contribution Margin per Unit, incorporating fixed costs, variable costs, the selling price per unit, and the desired profit level.
Step-by-step explanation:
The equation to determine how many sales dollars must be collected in order to attain a target profit can be derived from the basic profit equation, Profit = Revenue - Costs. To find the sales dollars necessary to achieve a given profit, rearrange the equation to Revenue = Profit + Costs. Here's a breakdown of the process:
- Identify fixed costs: These are costs that do not change regardless of the quantity of goods sold or produced.
- Calculate variable costs: Costs that vary directly with the level of production.
- Determine the price per unit: The amount you'll charge for each unit of your product or service.
- Set the target profit: The desired profit level you wish to achieve.
Now, the next step involves the concept of contribution margin, which is the selling price per unit minus variable cost per unit. Therefore, you can use the following formula to calculate the sales dollars needed:
Sales Dollars = (Fixed Costs + Target Profit) / Contribution Margin per Unit
To proceed with the previously given Step 5 information, if your profit-maximizing output level is an output quantity of 5 and you've made a profit of $40 with average cost consideration, you'd also need the selling price and variable cost per unit to use the formula above.
Averaging the profit to find the profit margin provides insight on how profitable the firm is per unit, and hence how many units need to be sold at that margin to reach the target profit.