# Target profit

Checked for updates, April 2022. Accountingverse.com

## Target Sales Volume Formula

One of the helpful uses of CVP analysis is the determination of the sales required to generate a target profit (or desired income).

The target sales volume required to achieve a specific level of income can be computed using the this formula:

 Target sales = Total fixed costs + Target income CM per unit

If the target income is on an after-tax basis, the formula to compute for the target sales would be:

 Total fixed costs + [Target income / (1-Tax rate)] CM per unit

If the target income is expressed in terms of percentage of sales (example, 20% of sales), the formula would be:

 Total fixed costs CM per unit - (Percentage x Selling price)

## Example

To illustrate the concepts above, consider the following data.

 Per Unit Total Sales (3,000 units) \$15 \$45,000 Less: Variable Costs 5 15,000 Contribution Margin \$10 \$30,000 Less: Fixed Costs 20,000 Operating Income \$10,000

Compute for the sales volume required to attain the following:

1. A target income of \$60,000 before taxes.
2. A target income of \$60,000 after taxes (40% tax rate).
3. A target income equal to 40% of sales.

1. A target income of \$60,000 before taxes

 Target sales = Total fixed costs + Target income CM per unit = \$20,000 + \$60,000 10 per unit Target sales = 8,000 units

Analysis: Selling 8,000 units will result in an operating income of \$60,000. To prove, let us compute for the net income at 8,000 units.

 Per Unit Total Sales (8,000 units) \$15 \$120,000 Less: Variable Costs 5 40,000 Contribution Margin \$10 \$ 80,000 Less: Fixed Costs 20,000 Operating Income \$ 60,000

2. A target income of \$60,000 after 40% tax

 Total fixed costs + [Target income /(1-Tax rate)] CM per unit 20,000 + [60,000/(1-40%)] = 20,000 + 100,000 10 10 Target sales = 12,000 units

To prove, let us compute for the income after tax at 12,000 units.

 Per Unit Total Sales (12,000 units) \$15 \$180,000 Less: Variable Costs 5 60,000 Contribution Margin \$10 \$120,000 Less: Fixed Costs 20,000 Operating Income \$100,000 Less: Income Tax (40%) 40,000 Net Income \$ 60,000

3. A target income of 40% of sales

 Total fixed costs CM per unit - (Percentage x Selling price) 20,000 = 20,000 10 - (40% x 15) 4 Target sales = 5,000 units

To prove, let us compute for the operating income at 5,000 units. Notice that the resulting income of \$30,000 is 40% of the \$75,000 sales.

 Per Unit Total Sales (5,000 units) \$15 \$75,000 Less: Variable Costs 5 25,000 Contribution Margin \$10 \$50,000 Less: Fixed Costs 20,000 Operating Income \$30,000

## Conclusion

Aside from the determination of the break-even point, the CVP analysis can determine the level of sales required to generate a specific level of income. The target income could be expressed on a before-tax basis or after-tax basis. It can also be expressed as a percentage of sales. In all those cases, nonetheless, the CVP analysis can compute for the required sales volume.

Key Takeaways

The target sales volume can be derived by tweaking the break-even formulae to incorporate the desired income.

 Target sales = Total fixed costs + [Target income / (1-Tax rate)] CM per unit

If desired income is expressed in percentage:

 Target sales = Total fixed costs CM per unit - (Percentage x Selling price)
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