Target Profit Analysis
Definition and Explanation of Target Profit:
Target profit is the amount of net operating income or profit that management desires to achieve at the end of a business period. Management needs to know the required level of business activities to get target profits.
Cost volume profit (CVP) equations and formulas can be used to determine the sales volume needed to achieve a target profit. The explanation of target profit analysis requires an example.
Example:
 Sales price per unit = $250
 Variable cost per unit = $150
 Total fixed expenses = $35,000
 Target Profit = $40,000
 Q = Number (Quantity) of units sold
Required:
How many units will have to be sold to earn a profit of $40,000?
Solution:
The CVP Equation Method:
Under CVP equation approach, we can find the number of units to be sold to obtain target profit by solving the equation where profits are equal to target profit (that is $40,000).
Sales = Variable expenses + Fixed expenses + Profit $250Q = $150 + $35,000 + $40,000 $100Q = $75,000 Q = $75,000 / $100 per unit Q = 750 Units 
Thus the target profit can be achieved by selling 750 units per month, which represents $187,500 in total sales ($250 × 750 units). This equation is also extensively used to calculate break even point. When break even point is calculated the value of profit in the equation is taken equal to ZERO.
The Contribution Margin Approach:
A second approach involves expanding the contribution margin formula to include the target profit.
[Unit sales to attain target profit = (Fixed expenses + Target Profit) ÷ Unit contribution margin]
This approach gives the same answer as the equation method since it is simply a short cut version of the equation method. similarly the dollar sales needed to attain the target profit can be computed as follows:
Dollar sales to attain the target profit = [(Fixed expenses + Target profit) ÷ CM ratio] = ($35,000 + $40,000) ÷ 0.40 = $187,500 No. of units to be sold = $187,500 / $250 =750 units 
Review Problem:
Voltar Company manufactures and sells a telephone answering machine. The Company’s contribution margin format income statement for the most recent year is given below:

Management is anxious to improve the company’s profit performance. Assume that next year management wants the company to earn a minimum profit of $90,000. How many units will have to be sold to meet the target profit figure?
Solution:
Equation Method:
Sales = Variable expenses + Fixed expenses + Profits $60Q = $45Q + $240,000 + $90,000 $15Q = $3330,000 Q = $3330,000 / $15 Per unit Q = 22,000 Units 
Contribution Margin Method:
[(Fixed expenses + Target profit) / Contribution margin per unit] [($240,000 + $90,000) / $15 Per unit] 22,000 Units 
You may also be interested in other articles from “cost volume profit relationship” chapter
 Contribution Margin and Basics of CVP Analysis
 Difference Between Gross Margin and Contribution Margin
 Cost Volume Profit (CVP) Relationship in Graphic Form
 Contribution Margin Ratio (CM Ratio)
 Importance of Contribution Margin
 Change in fixed cost and sales volume
 Change in variable cost and sales volume
 Change in fixed cost, sales price and sales volume
 Change in variable cost, fixed cost, and sales volume
 Change in regular sales price
 Break even point analysis (calculation of breakeven point by contribution margin and equation method)
 Target profit analysis
 Margin of safety
 Sales Mix and Break Even with Multiple Products
 Cost Volume Profit (CVP) Consideration in Choosing a Cost Structure
 Operating Leverage and degree of operating leverage
 Assumptions of Cost Volume Profit (CVP) Analysis
 Limitations of Cost Volume Profit Analysis
Other Related Accounting Articles:
 Gross Profit Ratio (GP Ratio)
 Gross Profit Analysis (GP Analysis)
 Net Profit Ratio (NP Ratio)
 Accounting Profit Formula Explained
Recommended Books !
Or
Download E accounting book in MSword format for just 20 $  Click here to Download