Target Profit Sales
It is a method to determine the number of units to be sold to achieve a target profit. This method helps in the planning of production activity by determining the number of units to be sold. By deciding on a target profit, the company secures itself from the losses, or we can also say that the company ensures to earn something above breakeven. This can also be called Target Profit Volume Calculator, as it shows the number of units to achieve the target level of profit. The target profit sales calculator calculates a such number of units required to achieve the target profit.
In order to calculate target profit sales, consider the following formula:
Target Profit Sales = (Target Profit + Fixed Cost) / Contribution per Unit
As said above, target profit sales is the level of sales where the number of units sold by the company will earn a targetted profit.
Let us put this in equation form.
Total Sales = Target Profit + Total Fixed Cost + Total Variable Cost
Since the selling price and variable cost are fixed per unit, the above equation can be written as:
Number of Units Sold*Selling Price per Unit = Target Profit + Total Fixed Cost + Number of Units Sold*Variable Cost per Unit
Assume the number of units to be sold be ‘x.’ Therefore,
Selling Price per Unit*(x) = Target Profit + Total Fixed Cost + Variable Cost per unit*(x)
On solving it,
Selling Price per Unit*(x) – Variable Cost per unit*(x) = Target Profit + Total Fixed Cost
(Selling Price per Unit – Variable Cost per unit)*(x) = Target Profit + Total Fixed Cost
x = (Target Profit + Total Fixed Cost) / (Selling Price per Unit – Variable Cost per unit)
Hence, Number of sales units to earn a target profit = (Target Profit + Total Fixed Cost) / Contribution per Unit
How to Calculate using Calculator?
Enter the following inputs into the target profit sales calculator.
Selling Price per Unit
Enter the selling price per unit of the product.
Variable Cost per Unit
Enter the variable cost per unit of the product.
Total Fixed Cost
Enter the amount of total fixed cost.
Enter the amount of profit that company wants to achieve.
Assume a company producing rackets has decided to earn a profit of $45,000. The company sells a racket for $81, while the variable cost for producing a unit is $64.5. The total fixed cost of the company is $21,000. Now, the number of rackets to sell to earn a profit of $45,000 is:
Target Profit Sales = (45,000 + 21,000) / (81 – 64.5) = 4,000 units
In the example above, the company has to produce 4,000 units in order to earn the target profit of $45,000. The target profit sales method determines the number of units that will derive a specified amount of profit to the company.