By calculating a target profit, they will produce and (hopefully) sell enough bird baths to cover both fixed costs and the target profit. Target profit analysis is a useful tool for planning and decision making in management accounting. It helps you determine the sales volume, price, or cost structure that will achieve a desired profit level.

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Where CMi is the contribution margin per unit of a relevant product, and wi is the proportion of a relevant product in the sales mix. Cost-volume-profit graphs are a useful way to visualize information related to sales, profits, costs, and net income. The company will need to generate $1,200,000 in sales to reach its target net income of $610,000 for the year. Jack will need to generate $1,100 in sales to reach his target net income of $750 for the month. In above CVP chart, red dot represents break-even sales and blue dot represents target sales. We can observe that the corporation breaks even at a sales volume of $1,120,000 and target sales for the next year are $1,680,000 which are $560,000 higher than the break-even sales.

## Apply the Formula

The contribution margin is used to determine the breakeven point of sales. By dividing the total fixed costs by the contribution margin ratio, the breakeven point of sales in terms of total dollars may be calculated. For example, a company with $100,000 of fixed costs and a contribution margin of 40% must earn revenue of $250,000 to break even. Sensitivity analysis is a valuable skill for management accounting, as it helps you plan, evaluate, and control your business activities and achieve your profit goals.

It is the amount of revenue that is earned after covering all fixed costs. It means when the business generates revenue beyond the break-even point, it starts earning profits. The management can set a specific amount as target profit above that break-even point. Note that in either scenario, the break-even point is the same in dollars and units, regardless of approach. Thus, you can always find the break-even point (or a desired profit) in units and then convert it to sales by multiplying by the selling price per unit.

## Step 2: How to calculate target profit

While there are exceptions and complications that could be incorporated, these are the general guidelines for break-even analysis. To compute target profit, just adapt one of the three net income formulas. Then simply plug target profit into one of these formulas as net income.

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Calculating target sales both in units and in dollars requires three steps. The main objective of target profit analysis with a sales mix is determining the number of units of each product that a company needs to sell to earn a desirable profit. EstroZ Inc. needs to sell 2,375 units in the following quarter to cover https://turbo-tax.org/indoor-tanning/ its costs and earn a target profit of $250,000. The dollar amount of target sales can be calculated by multiplying the number of units of 2,375 by the sales price of $900. In break-even point analysis article, we used equation method and contribution margin method to calculate break-even point of a company.

## Critical Thinking About CVP

Each loft is sold for \(\$500\), and the cost to produce one loft is \(\$300\), including all parts and labor. Ethical managers need an estimate of a product or service’s cost and related revenue streams to evaluate the chance of reaching the break-even point. Sensitivity analysis can provide you with information about the potential outcomes and risks of different scenarios, allowing you to make better decisions.

- We have already established that the contribution margin from \(225\) units will put them at break-even.
- The company wants to earn a profit of $80,000 for the first quarter of the year 2012.
- An alternative method using the weighted average cost to sales (C/S) ratio can be used to determine the target profit as well.
- Natalya Yashina is a CPA, DASM with over 12 years of experience in accounting including public accounting, financial reporting, and accounting policies.

The same formulas, with a little modification, can be used to calculate the sales both in units and in dollars to earn a target profit during a certain period of time. Notice that changes in volume only impact certain amounts within the “total column.” Volume changes did not impact fixed costs, nor change the per unit or ratio calculations. By reviewing the data, also note that it is necessary to produce and sell 1,000 units to achieve break-even net income. At 2,000 units, Leyland managed to achieve a $1,200,000 net income. Conversely, if only 500 units are produced and sold, the result will be a $600,000 loss.

## Determine the Timeframe

Target net income is the amount of money that a company hopes to earn in a given period of time. This may be different from the actual net income, which will depend on many factors such as sales volume and expenses. A company may use target net income to set goals and track progress over time.

### What is the formula for target profit in BEP?

The break-even point in sales revenue can now be calculated this way for Company A: Fixed costs/contribution to sales ratio = $200,000/0.34375 = $581,819 of sales revenue. To achieve a target profit of $300,000: (Fixed costs + required profit)/contribution to sales ratio = ($200,000 + $300,000)/0.34375 = $1,454,546.