Question

Unit sales to attain target profit = (Fixed Expenses + Target Profit) / CM per unit

a) True
b) False

Answer 1

The formula provided (Unit sales to attain target profit = (Fixed Expenses + Target Profit) / CM per unit) is indeed true.

Step-by-step explanation:

The formula provided (Unit sales to attain target profit = (Fixed Expenses + Target Profit) / CM per unit) is indeed true. This is a common equation used in cost-volume-profit (CVP) analysis, which helps a firm determine the level of sales needed to achieve a specific profit target. To understand this better, let's consider the given example. The formula provided is correct. The unit sales needed to achieve a target profit can be calculated by dividing the sum of fixed expenses and the target profit by the contribution margin per unit.

For example, if the fixed expenses are $500 and the target profit is $200, and the contribution margin per unit is $50, you would calculate:

Unit sales to attain target profit = ($500 + $200) / $50 = 14 units

Therefore, the formula is indeed true.