1. What Is Target Profit Calculation?

Target profit calculation determines the revenue level needed to achieve a specific profit goal after covering all fixed and variable costs. It's an essential tool for business planning and financial forecasting.

2. How Does The Calculator Work?

The calculator uses the target revenue formula:

Where:

• \( \text{Fixed Costs} \) — Costs that remain constant regardless of sales volume (currency)
• \( \text{Target Profit} \) — Desired profit level (currency)
• \( \text{Contribution Margin Ratio} \) — (Sales - Variable Costs) / Sales (decimal)

Explanation: This formula calculates the sales revenue required to cover fixed costs and achieve the target profit, based on the contribution margin ratio.

3. Importance Of Target Profit Analysis

Details: Target profit analysis helps businesses set realistic sales goals, plan budgets, make pricing decisions, and evaluate business viability. It's crucial for strategic planning and performance measurement.

4. Using The Calculator

Tips: Enter fixed costs and target profit in currency units. Contribution margin ratio should be entered as a decimal between 0 and 1 (e.g., 0.4 for 40%). All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between break-even and target profit?
A: Break-even calculates revenue to cover costs with zero profit, while target profit calculates revenue to achieve a specific profit level above costs.

Q2: How do I calculate contribution margin ratio?
A: Contribution Margin Ratio = (Total Revenue - Total Variable Costs) / Total Revenue, expressed as a decimal.

Q3: Can this be used for service businesses?
A: Yes, the formula applies to both product and service businesses, as long as you can determine fixed costs and contribution margin ratio.

Q4: What if my margin ratio changes with volume?
A: For accurate results, use the expected average margin ratio for the target sales volume range.

Q5: How often should I recalculate target revenue?
A: Recalculate whenever costs, pricing, or profit targets change significantly, typically during quarterly or annual planning.