Accounting and Finance Foundations

Unit 11

Accounting and Finance Foundations Unit 11: Financial Analysis 850

Financial Analysis

Chapter 24

Student Guide

Lesson 24.1 Break-Even Analysis (cont’d)

To determine the number of units that must be sold to reach a desired profit, managers conduct cost-

volume-profit analysis. To determine how many products need to be sold to obtain a certain target profit,

we can use the following formula:

(Sales Price Per Product * x) – (Variable Costs Per Product * x) – Total Fixed Costs = Profit

Example: Using our previous example of Joe’s ice cream, let’s find out how many ice cream cones Joe

must sell if he wants to make a profit of $500.

Solution: To determine how many ice cream cones must be sold to make $500 in profit, let’s plug our sales

price per product, variable costs per product, total fixed costs, and profit into our formula.

$1.15x – $0.19x – $800 = $500

Now, treat this as an algebraic equation, and solve for x.

$1.15x – $0.19x – $800 = $500

$0.96x - $800 = $500

$0.96x = $500 + $800

$0.96x = $1,300

x = $1,300 / $0.96

x = 1,354.17 cones

Joe must sell 1,355 ice cream cones to make a $500.00 profit.