Posted: June 6th, 2022

Assignment Exercise 18-3 (p. 565) Target Operating Income

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Create the required table in an Excel document and submit the assignment via the link provided below.

Refer to Practice Exercise 18-II which is on page 565 in the eText. The answer to this sample exercise is presented on page 589 in the eText. You can use the same approach to solve GHA 10.

The general idea of this question is this:

A company wants to make $100,000. This is what is referred to as their “target operating income“.

They have a product that sells for $80.

The variable cost per item is $60 — so every time they make an item it costs them $60.

Their total fixed cost is $60,000 — so, no matter how many items they make they will have $60,000 in expenses.

There are two types of dollar amounts that we mentioned in the assumptions above: 1. overall dollar amounts 2. per item costs

If we look at the per item costs, we can see that each unit of the item sells for $80 but costs $60 to produce. The difference between these two numbers is what is known as the ‘contribution margin’ per unit. It is called the contribution margin because this is the amount of money that is ‘contributed’ to the operating income each time an item is sold.

The Assignment asks you to determine the required revenue (per unit sales price X volume of items sold) to achieve the desired operating income.

If you look in the middle of page 219 you will see the formula for Target Operating Income Using the Contribution Margin Method:

N = (fixed costs + target operating income)/ (contribution margin per unit)

If you plug in the identified numbers (based on the information above), you will determine the number of units (“N”) that will need to be sold in order to achieve an operating income of $100,000.

To complete the exercise, you use this value of “N” to show your work by creating a table that looks like the calculations at the top of page 220.

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