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This quiz focuses on Target Profit Analysis, giving you a quick way to practice the rules, question types, and explanations that matter most for Managerial Accounting.
Managerial Accounting Quiz: Target Profit Analysis
20 questions · exam conditions
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Target Profit AnalysisQuestion 1 of 20
A company sells two products, Gizmos and Widgets. The company's total fixed costs are $336,000 per month. The sales mix is maintained at a constant three Gizmos for every two Widgets sold. Additional data is as follows:
| Product | Selling Price | Variable Cost |
|---|---|---|
| Gizmo | $80 | $50 |
| Widget | $120 | $60 |
Given the data in the passage, how many Gizmos must be sold for the company to achieve a target monthly operating profit of $84,000?
A4,200 units
B6,300 units
C8,400 units
D10,500 units
Managerial Accounting Quiz
Managerial Accounting Quiz: Target Profit Analysis
Practice Target Profit Analysis in Managerial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.
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Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.
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Question 1
A company sells two products, Gizmos and Widgets. The company's total fixed costs are $336,000 per month. The sales mix is maintained at a constant three Gizmos for every two Widgets sold. Additional data is as follows:
| Product | Selling Price | Variable Cost |
|---|---|---|
| Gizmo | $80 | $50 |
| Widget | $120 | $60 |
Given the data in the passage, how many Gizmos must be sold for the company to achieve a target monthly operating profit of $84,000?
- 4,200 units
- 6,300 units (correct answer)
- 8,400 units
- 10,500 units
Explanation: This problem requires calculating the weighted-average contribution margin for a 'bundle' of products to determine the number of bundles needed, and then finding the units of a specific product.
-
Calculate Contribution Margin per Unit for each product:
- Gizmo: $80 - $50 = $30
- Widget: $120 - $60 = $60
-
Calculate the Contribution Margin of a sales bundle: The sales mix is 3 Gizmos to 2 Widgets.
- Bundle CM = (3 units × $30/Gizmo) + (2 units × $60/Widget) = $90 + $120 = $210.
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Calculate the number of bundles needed: The total contribution margin required is Fixed Costs + Target Profit = $336,000 + $84,000 = $420,000.
- Number of Bundles = Total Required CM / Bundle CM = $420,000 / $210 = 2,000 bundles.
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Calculate the number of Gizmos: Each bundle contains 3 Gizmos.
- Required Gizmos = 2,000 bundles × 3 Gizmos/bundle = 6,300 units.
Question 2
A company is planning its operations for the upcoming year. The CEO has set a target for operating income to be $180,000. Management receives a bonus equal to 10% of operating income before the bonus is deducted. The company's product has a contribution margin of $40 per unit, and annual fixed costs are $200,000 (excluding any bonus). How many units must be sold to achieve the target operating income of $180,000 after the bonus has been paid?
- 9,500 units
- 9,950 units
- 10,500 units
- 10,000 units (correct answer)
Explanation: This problem involves a bonus that is dependent on profit, which requires calculating a pre-bonus profit target.
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Define the relationship between pre-bonus and after-bonus profit: Let P_before be the operating income before the bonus, and P_after be the operating income after the bonus. The target P_after is $180,000.
- P_after = P_before - Bonus
- Bonus = 0.10 × P_before
- P_after = P_before - (0.10 × P_before) = 0.90 × P_before
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Calculate the required pre-bonus operating income (P_before): This becomes the target profit for the standard CVP calculation.
- $180,000 = 0.90 × P_before
- P_before = $180,000 / 0.90 = $200,000.
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Calculate required sales units: Use the pre-bonus profit target in the formula.
- Required Units = (Fixed Costs + P_before) / Contribution Margin per Unit
- Required Units = ($200,000 + $200,000) / $40 = $400,000 / $40 = 10,000 units.
Question 3
A company manufactures a single product that sells for $150 per unit. Variable costs are $90 per unit, and annual fixed costs total $480,000. The company is subject to a 25% income tax rate. How many units must the company sell to achieve an after-tax net income of $180,000?
- 10,000 units
- 11,000 units
- 12,000 units (correct answer)
- 15,600 units
Explanation: To solve for the required sales in units for a target after-tax profit, we must first convert the target net income into a pre-tax operating income. The formula is: Target Operating Income = Target Net Income / (1 - Tax Rate).
- Calculate Target Operating Income: Target Operating Income = $180,000 / (1 - 0.25) = $180,000 / 0.75 = $240,000.
- Calculate Contribution Margin per Unit: Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit = $150 - $90 = $60.
- Calculate Required Sales in Units: Units = (Fixed Costs + Target Operating Income) / Contribution Margin per Unit = ($480,000 + $240,000) / $60 = $720,000 / $60 = 12,000 units.
Question 4
A firm currently sells 30,000 units for $50 per unit. Variable costs are $20 per unit, and fixed costs are $600,000. The firm is considering a new automated system that would increase fixed costs to $750,000 but decrease variable costs to $15 per unit.
If the firm adopts the new system, how many units must it sell to achieve a target operating profit of $300,000?
- 25,000 units
- 27,500 units
- 30,000 units (correct answer)
- 35,000 units
Explanation: The question asks for the required sales volume under a new proposed cost structure to meet a specific profit target.
-
Identify the new cost structure parameters:
- New Fixed Costs = $750,000
- New Variable Cost per Unit = $15
- Selling Price remains $50 per unit.
-
Calculate the new Contribution Margin per Unit:
- New CM per Unit = $50 - $15 = $35.
-
Calculate the required sales in units for the target profit:
- Target Profit = $300,000.
- Required Units = (New Fixed Costs + Target Profit) / New CM per Unit
- Required Units = ($750,000 + $300,000) / $35 = $1,050,000 / $35 = 30,000 units.
Question 5
A company plans to sell 15,000 units of its product to generate a target operating profit of $70,000. The variable cost per unit is $30, and total fixed costs are $200,000. To achieve this profit goal, what selling price must the company set for its product?
- $38.00
- $45.00
- $48.00 (correct answer)
- $52.00
Explanation: This question requires rearranging the target profit formula to solve for the selling price.
-
Determine the total contribution margin required: The total contribution margin must cover both fixed costs and the target profit.
- Total Required CM = Fixed Costs + Target Profit = $200,000 + $70,000 = $270,000.
-
Calculate the required contribution margin per unit: This is the total required CM spread over the planned sales volume.
- Required CM per Unit = Total Required CM / Number of Units = $270,000 / 15,000 units = $18 per unit.
-
Calculate the required selling price: The selling price must cover both the variable cost and the required contribution margin.
- Selling Price = Variable Cost per Unit + Required CM per Unit = $30 + $18 = $48.
Question 6
A company has a margin of safety of $300,000 on current sales of $1,200,000. The company's contribution margin ratio is 25%.
Based on the information in the passage, what level of sales revenue is required for the company to achieve a target operating profit of $100,000?
- $1,000,000
- $1,125,000
- $1,200,000
- $1,300,000 (correct answer)
Explanation: This problem requires using the margin of safety information to determine the company's fixed costs before calculating the sales needed for the new target profit.
- Calculate Breakeven Sales: Breakeven Sales = Current Sales - Margin of Safety = $1,200,000 - $300,000 = $900,000.
-
Calculate Fixed Costs: At the breakeven point, the total contribution margin equals fixed costs.
- Fixed Costs = Breakeven Sales × Contribution Margin Ratio = $900,000 × 0.25 = $225,000.
-
Calculate Required Sales for Target Profit: Use the target profit formula.
- Required Sales = (Fixed Costs + Target Profit) / Contribution Margin Ratio
- Required Sales = ($225,000 + $100,000) / 0.25 = $325,000 / 0.25 = $1,300,000.
Question 7
A consulting firm has annual fixed costs of $1,500,000. The firm employs 40 consultants, and each consultant is expected to bill 1,600 hours annually. The variable cost associated with each billable hour is $75. The firm's target operating profit is $980,000.
Based on the passage, what is the minimum hourly billing rate the firm must charge its clients to meet its profit target?
- $113.75 (correct answer)
- $125.00
- $136.25
- $150.00
Explanation: This problem applies target profit analysis to a service firm context, requiring a calculation of the required 'selling price' (billing rate).
- Calculate Total Billable Hours (Volume): Total Hours = Number of Consultants × Hours per Consultant = 40 × 1,600 = 64,000 hours.
- Determine Total Contribution Margin Required: This must cover both fixed costs and the target profit. Total Required CM = $1,500,000 (Fixed Costs) + $980,000 (Target Profit) = $2,480,000.
- Calculate Required Contribution Margin per Hour: Required CM per Hour = Total Required CM / Total Hours = $2,480,000 / 64,000 hours = $38.75 per hour.
- Calculate Minimum Billing Rate: Billing Rate = Variable Cost per Hour + Required CM per Hour = $75.00 + $38.75 = $113.75.
Question 8
A company needs to generate $800,000 of sales revenue to achieve a target after-tax profit of $63,000. Total fixed costs are $210,000, and the company's income tax rate is 30%. What is the company's variable cost ratio?
- 37.5%
- 42.5%
- 57.5%
- 62.5% (correct answer)
Explanation: This question requires working backward from target sales revenue and after-tax profit to find the variable cost ratio.
- Calculate Target Operating Income (Pre-tax Profit): Target Operating Income = Target Net Income / (1 - Tax Rate) = $63,000 / (1 - 0.30) = $63,000 / 0.70 = $90,000.
-
Calculate the required Contribution Margin Ratio (CM Ratio): The formula for target sales is Sales = (Fixed Costs + Target Operating Income) / CM Ratio. Rearranging gives: CM Ratio = (Fixed Costs + Target Operating Income) / Sales Revenue.
- CM Ratio = ($210,000 + $90,000) / $800,000 = $300,000 / $800,000 = 0.375 or 37.5%.
-
Calculate the Variable Cost Ratio (VC Ratio): The VC Ratio is 1 minus the CM Ratio.
- VC Ratio = 1 - CM Ratio = 1 - 0.375 = 0.625 or 62.5%.
Question 9
A company has sales of $2,000,000, operating income of $200,000, and a degree of operating leverage of 4. The company has a tax rate of 30%. What sales revenue is required to earn a target after-tax net income of $210,000?
- $2,125,000
- $2,250,000 (correct answer)
- $2,300,000
- $2,500,000
Explanation: This is a multi-step problem that requires first determining the company's cost structure using the degree of operating leverage (DOL).
- Calculate Contribution Margin (CM): DOL = CM / Operating Income => 4 = CM / $200,000 => CM = $800,000.
- Calculate CM Ratio: CM Ratio = CM / Sales = $800,000 / $2,000,000 = 0.40 or 40%.
- Calculate Fixed Costs (FC): FC = CM - Operating Income = $800,000 - $200,000 = $600,000.
- Calculate Target Operating Income: Target Operating Income = Target Net Income / (1 - Tax Rate) = $210,000 / (1 - 0.30) = $300,000.
- Calculate Required Sales Revenue: Sales = (FC + Target Operating Income) / CM Ratio = ($600,000 + $300,000) / 0.40 = $900,000 / 0.40 = $2,250,000.
Question 10
A company has annual fixed costs of $900,000 and a variable cost ratio of 60%. The company has set a target operating profit of 15% of total sales revenue. What is the total sales revenue the company must generate to meet its target?
- $2,250,000
- $3,600,000 (correct answer)
- $4,200,000
- $6,000,000
Explanation: When target profit is a percentage of sales, an algebraic equation is needed. Let S be the total sales revenue.
The basic CVP formula is: Sales = Variable Costs + Fixed Costs + Operating Profit.
-
Set up the equation with given ratios:
- Variable Costs = 0.60 * S
- Fixed Costs = $900,000
- Operating Profit = 0.15 * S
- S = (0.60 * S) + $900,000 + (0.15 * S)
-
Solve for S:
- S = 0.75 * S + $900,000
- S - 0.75 * S = $900,000
- 0.25 * S = $900,000
- S = $900,000 / 0.25 = $3,600,000. Alternatively, the formula is Sales = Fixed Costs / (Contribution Margin Ratio - Target Profit Ratio). CM Ratio = 1 - 0.60 = 0.40. Sales = $900,000 / (0.40 - 0.15) = $900,000 / 0.25 = $3,600,000.
Question 11
A manufacturing company has a contribution margin ratio of 40%. The company wants to achieve a target operating profit that is 25% of its total contribution margin. If the company's fixed costs are $240,000, what is the required level of sales revenue?
- $600,000
- $800,000 (correct answer)
- $960,000
- $1,000,000
Explanation: This problem defines target profit relative to contribution margin, requiring an algebraic approach.
-
Set up the CVP relationships: Let S = Sales Revenue and CM = Contribution Margin.
- CM = Fixed Costs + Operating Profit
- CM = 0.40 * S
- Operating Profit = 0.25 * CM
-
Substitute the profit definition into the first equation:
- CM = Fixed Costs + (0.25 * CM)
-
Solve for the required total Contribution Margin:
- CM - 0.25 * CM = Fixed Costs
- 0.75 * CM = $240,000
- CM = $240,000 / 0.75 = $320,000.
-
Calculate the required Sales Revenue: Since CM = 0.40 * S:
- $320,000 = 0.40 * S
- S = $320,000 / 0.40 = $800,000.
Question 12
A company projects the following contribution format income statement data for the upcoming period:
Sales (20,000 units): $1,000,000 Variable expenses: $600,000 Fixed expenses: $320,000
The company is subject to a 30% income tax rate. How many additional units must be sold to achieve an after-tax profit of $84,000?
- 1,000 units
- 2,000 units (correct answer)
- 4,000 units
- 6,000 units
Explanation: This question requires calculating the total units for a target profit and comparing it to the current level.
-
Extract CVP parameters from the provided data:
- Selling Price per Unit = $1,000,000 / 20,000 units = $50.
- Variable Cost per Unit = $600,000 / 20,000 units = $30.
- Contribution Margin per Unit = $50 - $30 = $20.
- Fixed Costs = $320,000.
-
Calculate the Target Operating Income (Pre-tax):
- Target Operating Income = Target Net Income / (1 - Tax Rate) = $84,000 / (1 - 0.30) = $120,000.
-
Calculate Total Units Required for Target Profit:
- Total Units = (Fixed Costs + Target Operating Income) / CM per Unit
- Total Units = ($320,000 + $120,000) / $20 = $440,000 / $20 = 22,000 units.
-
Calculate Additional Units Needed:
- Additional Units = Total Required Units - Current Units = 22,000 - 20,000 = 2,000 units.
Question 13
Company A has fixed costs of $200,000 and a contribution margin of $20 per unit. Company B has fixed costs of $320,000 and a contribution margin of $25 per unit. Both companies want to achieve a target operating profit of $80,000. How many more units must Company B sell than Company A to achieve the target profit?
- 2,000 units (correct answer)
- 2,400 units
- 14,000 units
- 16,000 units
Explanation: This question requires calculating the required sales volume for two different companies and then finding the difference.
-
Calculate Required Units for Company A:
- Units_A = (Fixed Costs_A + Target Profit) / CM per Unit_A
- Units_A = ($200,000 + $80,000) / $20 = $280,000 / $20 = 14,000 units.
-
Calculate Required Units for Company B:
- Units_B = (Fixed Costs_B + Target Profit) / CM per Unit_B
- Units_B = ($320,000 + $80,000) / $25 = $400,000 / $25 = 16,000 units.
-
Find the Difference:
- Difference = Units_B - Units_A = 16,000 - 14,000 = 2,000 units.
Question 14
A company sells its product for $75 per unit. Variable costs are $45 per unit, and fixed costs are $240,000. In addition to these costs, the sales team earns a commission of 10% of sales revenue. How many units must the company sell to achieve a target operating profit of $90,000?
- 11,000 units
- 12,444 units
- 16,500 units
- 14,667 units (correct answer)
Explanation: The sales commission is a variable cost that is a percentage of the selling price. It must be included in the total variable cost per unit when calculating the contribution margin.
-
Calculate the total variable cost per unit:
- Standard Variable Cost = $45.00
- Sales Commission per Unit = 10% of Selling Price = 0.10 × $75 = $7.50
- Total Variable Cost per Unit = $45.00 + $7.50 = $52.50
-
Calculate the contribution margin per unit:
- Contribution Margin per Unit = Selling Price - Total Variable Cost per Unit = $75.00 - $52.50 = $22.50
-
Calculate the required sales in units:
- Required Units = (Fixed Costs + Target Profit) / Contribution Margin per Unit
- Required Units = ($240,000 + $90,000) / $22.50 = $330,000 / $22.50 = 14,666.67 units, which rounds to 14,667 units.
Question 15
A company manufactures two products, Lux and Basic. The firm's total fixed costs are $450,000. Currently, the sales mix is 1 unit of Lux for every 4 units of Basic. The company is considering a new marketing strategy that will shift the mix to 1 unit of Lux for every 2 units of Basic. This strategy would increase fixed costs by $30,000. The per-unit data is:
| Product | Selling Price | Variable Cost |
|---|---|---|
| Lux | $100 | $40 |
| Basic | $50 | $30 |
How would the total number of units required to achieve a target profit of $110,000 change if the new marketing strategy is adopted?
- Decrease by 2,300 units (correct answer)
- Decrease by 4,500 units
- Increase by 2,300 units
- Increase by 4,500 units
Explanation: This is a two-scenario comparison problem involving a change in sales mix and fixed costs.
-
Analyze the Original Scenario:
- Contribution Margins: Lux = $100 - $40 = $60; Basic = $50 - $30 = $20.
- Original Bundle (1 Lux, 4 Basic) CM = (1 × $60) + (4 × $20) = $60 + $80 = $140.
- Required Bundles = (Fixed Costs + Target Profit) / Bundle CM = ($450,000 + $110,000) / $140 = $560,000 / $140 = 4,000 bundles.
- Original Total Units = 4,000 bundles × 5 units/bundle = 20,000 units.
-
Analyze the New Scenario:
- New Fixed Costs = $450,000 + $30,000 = $480,000.
- New Bundle (1 Lux, 2 Basic) CM = (1 × $60) + (2 × $20) = $60 + $40 = $100.
- Required Bundles = ($480,000 + $110,000) / $100 = $590,000 / $100 = 5,900 bundles.
- New Total Units = 5,900 bundles × 3 units/bundle = 17,700 units.
- Calculate the Change: Change = New Total Units - Original Total Units = 17,700 - 20,000 = -2,300 units. This is a decrease of 2,300 units.
Question 16
A company has two divisions, Retail and Commercial. The company-wide fixed costs that are not traceable to either division are $220,000. The company's overall target operating profit is $350,000. The Commercial division is projected to generate sales revenue of $1,200,000. Financial data for the divisions is as follows:
| Division | Variable Cost Ratio | Traceable Fixed Costs |
|---|---|---|
| Retail | 60% | $180,000 |
| Commercial | 70% | $150,000 |
To achieve the company's overall profit target of $350,000, what amount of sales revenue must the Retail division generate?
- $1,100,000
- $1,250,000
- $1,350,000 (correct answer)
- $1,400,000
Explanation: This problem requires calculating a required sales level for one division given the company's overall profit target and the performance of the other division.
-
Calculate the projected segment margin for the Commercial division:
- Commercial CM Ratio = 1 - 0.70 = 0.30.
- Commercial Contribution Margin = $1,200,000 × 0.30 = $360,000.
- Commercial Segment Margin = CM - Traceable Fixed Costs = $360,000 - $150,000 = $210,000.
-
Determine the required segment margin for the Retail division:
- Company Profit = (Retail Segment Margin + Commercial Segment Margin) - Common Fixed Costs
- $350,000 = (Retail Segment Margin + $210,000) - $220,000
- $350,000 = Retail Segment Margin - $10,000
- Retail Segment Margin = $360,000.
-
Calculate the required sales revenue for the Retail division:
- Retail Segment Margin = (Retail Sales × Retail CM Ratio) - Retail Traceable Fixed Costs
- Retail CM Ratio = 1 - 0.60 = 0.40.
- $360,000 = (Retail Sales × 0.40) - $180,000
- $540,000 = Retail Sales × 0.40
- Retail Sales = $540,000 / 0.40 = $1,350,000.
Question 17
A company's product sells for $200 per unit, with variable costs of $120 per unit. Fixed costs are $400,000 per year within a relevant range of 0 to 6,000 units. If the company produces and sells more than 6,000 units, fixed costs will increase by $80,000. What is the required sales volume in units to achieve a target operating profit of $160,000?
- 7,000 units
- 7,250 units
- 8,000 units (correct answer)
- 8,500 units
Explanation: This problem involves a step-fixed cost, requiring a two-step analysis.
-
Initial Calculation: First, calculate the required units using the initial fixed cost level.
- Contribution Margin per Unit = $200 - $120 = $80.
- Required Units = (Fixed Costs + Target Profit) / CM per Unit = ($400,000 + $160,000) / $80 = $560,000 / $80 = 7,000 units.
- Check Relevant Range: The calculated volume of 7,000 units is outside the relevant range of 0 to 6,000 units for the $400,000 fixed cost level.
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Recalculate with New Fixed Costs: Since the required volume exceeds 6,000 units, the higher fixed cost of $400,000 + $80,000 = $480,000 must be used.
- Required Units = ($480,000 + $160,000) / $80 = $640,000 / $80 = 8,000 units. This new volume of 8,000 units is within the new relevant range (above 6,000 units), so it is the correct answer.
Question 18
Zenith Manufacturing has fixed costs of $120,000, variable cost per unit of $8, and a selling price of $20 per unit. If the company wants to achieve an after-tax profit of $60,000 and has a tax rate of 25%, what is the required sales volume in units?
- 25,000 units
- 20,000 units
- 17,000 units (correct answer)
- 15,000 units
Explanation: First, calculate the required pre-tax profit: $60,000 ÷ (1 - 0.25) = 80,000.ThenusetheCVPformula:Requiredunits=(Fixedcosts+Targetpre−taxprofit)÷Contributionmarginperunit=(120,000 + 80,000)÷(20 - $8) = $200,000 ÷ $12 = 16,667 units, which rounds to 17,000 units. Choice A uses after-tax profit directly without adjusting for taxes. Choice B incorrectly calculates pre-tax profit as $60,000 × 1.25. Choice D uses only the after-tax target profit in the numerator.
Question 19
Zeta Inc. has the following cost structure: fixed costs $180,000, variable cost per unit $12, selling price per unit $30. The company wants to achieve an after-tax ROI of 18% on assets of $600,000, with a tax rate of 25%. If variable costs are expected to increase by 25%, what selling price per unit is required to maintain the same unit sales volume of 12,000 units?
- $48.00
- $45.00
- $42.00 (correct answer)
- $39.00
Explanation: Target after-tax profit = $600,000 × 18% = $108,000. Pre-tax profit needed = $108,000 ÷ (1 - 0.25) = $144,000. New variable cost = $12 × 1.25 = $15. Total contribution margin needed = $180,000 + $144,000 = $324,000. Contribution margin per unit needed = $324,000 ÷ 12,000 = $27. Required selling price = $15 + $27 = $42. Choice A adds the full profit requirement to the price. Choice B uses the original variable cost. Choice D ignores the variable cost increase.
Question 20
Theta Corp currently operates at 80% of capacity, selling 16,000 units at $35 per unit. Variable costs are $21 per unit and fixed costs are $168,000. If the company wants to achieve a target profit of $70,000 while operating at full capacity, what should be the new selling price per unit?
- $32.90 (correct answer)
- $30.50
- $28.75
- $26.40
Explanation: Full capacity = 16,000 ÷ 0.80 = 20,000 units. Total contribution margin needed = $168,000 + $70,000 = $238,000. Contribution margin per unit needed = $238,000 ÷ 20,000 = $11.90. New selling price = $21 + $11.90 = $32.90. Choice B uses the current contribution margin ratio incorrectly. Choice C assumes fixed costs will decrease proportionally. Choice D uses the original selling price calculation method.