1. What is the Target Profit Formula?

The Target Profit Formula calculates the sales revenue needed to achieve a specific profit target, considering fixed costs and contribution margin ratio. It's a fundamental tool in cost-volume-profit analysis for business planning.

2. How Does the Calculator Work?

The calculator uses the Target Profit Formula:

Where:

• \( Fixed\ Costs \) — Total fixed costs in dollars
• \( Target\ Profit \) — Desired profit in dollars
• \( CM\ Ratio \) — Contribution margin ratio (0-1)

Explanation: The formula determines the sales revenue needed to cover both fixed costs and the desired profit, based on the contribution margin ratio which represents the percentage of each sales dollar available to cover fixed costs and profit.

3. Importance of Target Profit Calculation

Details: Calculating target profit helps businesses set realistic sales goals, plan budgets, make pricing decisions, and evaluate the feasibility of profit targets. It's essential for financial planning and strategic decision-making.

4. Using the Calculator

Tips: Enter fixed costs and target profit in dollars. The CM ratio must be between 0 and 1 (e.g., 0.4 for a 40% contribution margin ratio). All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is the contribution margin ratio?
A: The contribution margin ratio is the percentage of each sales dollar that remains after variable costs are subtracted, available to cover fixed costs and contribute to profit.

Q2: How is CM ratio calculated?
A: CM Ratio = (Sales - Variable Costs) / Sales, or alternatively, CM Ratio = Contribution Margin per Unit / Selling Price per Unit.

Q3: What's the difference between target profit and break-even?
A: Break-even analysis calculates the sales needed to cover all costs (zero profit), while target profit analysis calculates sales needed to achieve a specific profit level.

Q4: Can this formula be used for service businesses?
A: Yes, the target profit formula applies to both product and service businesses, as long as you can determine fixed costs, variable costs, and contribution margin.

Q5: What assumptions does this formula make?
A: The formula assumes constant selling price, constant variable cost per unit, fixed costs remain unchanged, and a single product or constant sales mix.