Assume the following: (1) Desired target operating income $20,000; unit price for sales $500; variable costs per unit $300; total fixed cost $10,000. (2) We have applied the formula to calculate the contribution margin method of determining target operating income, and have arrived at a numerator amount of $30,000 (20,000 plus 10,000) and a denominator amount of $200 (500 minus 300). (3) These figures yield an answer of 150 units (30,000 divided by 200). What is the required revenue to achieve the target operating income of $20,000?

$75,000

Explanation:

The targeted operating income is the difference between the targeted total sales and the budgeted total cost. The total cost is the sum of the fixed and variable cost. The sales and variable cost are dependent on the level of activities or number of units produced and sold.

The difference between the sales and variable cost gives the contribution margin.

Let the number of units sold be c

500c - 300c - 10,000 = 20,000

200c = 30,000

c = 150 units

Required revenue to earn target income is the product of the unit sales with the number of units sold

= $500 × 150

= $75,000

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