What is Target Profit?

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Target Profit (wallstreetmojo.com)

Target Profit Formula

This formula is derived by evaluating the company’s situation to achieve the break-even pointBreak-even PointIn accounting, the break even point is the point or activity level at which the volume of sales or revenue exactly equals total expenses. In other words, it is a point at which neither a profit nor a loss is made and the total cost and total revenue of the business are equal.read more where the company can bear the fixed cost of the business expenditure and cover the necessary variable cost. For the same, the revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more that needs to be achieved to attain the target profit can be illustrated as follows;

Where,

  • Revenue = The Revenue or Sales amount that needs to be achieved to attain the target profit% of Gross Margins = It denotes the percentage of profit is to be gained from the sales amount

The above formula will provide the sales amount, and if the total sales unit is to be found, then the same formula could be;

Examples

The management of a company named ABC Inc. after finalizing the target profit to be achieved in the next quarter wanted to equate the sales revenue that would be needed. For the evaluation of the revenue required following information is made available. Comment on the sales required.

  • Target Profit = $ 1400000Fixed CostFixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more = $ 210000% of Gross Margin = 70%

  • = 210000 + 1400000 / 70%= $2300000

Hence to make a target profit of $ 1400000 in the next quarter, the company needs to make a sale of $ 2300000 with a 70% gross margin.

Target Profit Analysis

Target analysis is a small part of cost volume profit analysisCost Volume Profit AnalysisCost Volume Profit Analysis (CVP) is a way to understand the relationship between cost & sales and profit. It determines the effect of change in cost and sales on the profit of the company.read more, which is a wider concept. This covers evaluating the sales level or the amount of revenue that needs to be generated to earn a targeted profit after covering the fixed overhead expenditures and variable overhead expenditures in the targeted period. It is the next step for the organizations after the break-even platform where the revenue from the sales is only able to cover fixed & variable overhead without any profit. Still, in the target profit analysis, the company’s target is to earn the targeted profit over and above the expenditures.

Advantages

  • It provides less variation in the actual results compared to the budgeted profit. It tends to be more reliable. As well as the target profit gets updated as per actual results, it becomes more feasible and reliable to use.It provides a detailed analysis of the business’s cost structure, including the fixed cost structure as well as the variable cost structure of the asset. The incorporation of the selling price & cost of the asset for the evaluation of the gross margin percentage also shows the profitability of the companyProfitability Of The CompanyProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more. So, this also helps in the overall evaluation of the company’s profit-making capability.It also helps the management make the decision-making regarding the business operationand s finalize the company’s mission and goal for the upcoming periods. This analysis can help in predicting the capability and help in making the decision-making process.

Disadvantages

  • The variation is less, but the system is open to manual errors or mistakes. As the gross margin calculation and the intakes of the variable overheads are to be incorporated by a person, there are chances of error in calculation, which may lead to inaccurate results or projections.Since this analysis required updates regularly, this could sometimes become a serious and hectic task for the team.

Conclusion

Overall, the target profit analysis helps the company identify its mission for the targeted period through evaluation of its overheads and profit-making ability. The usage of this method has been increased and adapted from large profit-making companies to the dormant ones. The regular update of the existing scenario helps it be a realistic analysis and more accurate to show low variation compared to actual results.

This has been a guide to What is Target Profit & its Definition. Here we discuss its formula, calculations, examples, analysis, advantages, and disadvantages. You can learn more about it from the following articles –

  • Target CostCost ManagementLimit PricingCorporate Profit