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# Target Profit

## Introduction

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

What's in Here

In this lesson, we will learn how to calculate the number of units to sell in order to generate a desired level of profit. This can be achieved by tweaking the break-even formula and incorporating the desired profit.

## Target Sales Volume Formula

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.

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