Cost Volume Profit Analysis (CVP): Target Profit
How to calculate target profit
The target profit calculation is a popular tool used by accounting and bookkeeping professionals to create accurate financial forecasts for their businesses. The cost volume profit target analysis, also known as the CVP analysis, is the method that is most frequently used to determine target profit. To determine your organization’s target profit using the CVP analysis, follow these steps:
1. Establish a time frame
Choose an endpoint and desired profit for your target profit estimation before you do anything else. Some businesses prefer to determine their target profit per quarter, whereas others do it yearly. You can determine the necessary numbers to finish the calculation once you’ve chosen the appropriate date and the amount of money you hope to make by that time.
2. Determine the contribution margin
Your product or service price less any associated manufacturing or production costs is your contribution margin. When conducting a CVP analysis to determine target profit, it is imperative to know the profit your company makes on each unit sold.
3. Identify fixed costs
Determine your fixed cost expenditures to determine your target profit. Regardless of production or sales, your company must pay fixed costs. The rent or mortgage on your workspace, utilities, and office supplies are typical examples of fixed costs. These costs have an effect on the potential for overall profit, so you should factor them into your target profit calculation.
4. Apply the formula
You can use the CVP formula to calculate your target profit once you’ve established the target profit calculation deadline, the contribution margin, and any fixed costs.
Insert your figures into the formula. The sum will indicate how many sales you must make to reach your desired profit level.
5. Adjust as needed
You can modify your desired, intended profit once you see the initial calculation and estimate to determine how many more or fewer products you’ll need to sell to meet your objectives. Using this formula, it is simple to produce a variety of projections.
What is the target profit formula?
Businesses use the target profit formula to calculate how much revenue the company should generate over a predetermined time period. Typically, businesses use this metric to plan budgets, anticipate future development, and maximize investments. It’s critical to keep in mind that because target profit is an estimate, the actual profit your business makes may vary depending on sales, expenses, and other factors.
Example target profit calculation
Here is an example of how to determine the target profit using CVP analysis:
Personalized blankets and throws are made for customers by the custom blanket company Bountiful Blankets. The business targets a $140,000 third-quarter profit. The accounting department of the company decides to use the CVP analysis to determine how many blankets must be sold in order to make their desired profit. They establish the following information:
They use the CVP analysis formula: projected sales = (target profit + fixed costs)/contribution margin per unit.
($140,000 + $14,000) / $19 = 8,105
In order to reach their target profit goal of $140,000 during the third quarter, Bountiful Blankets must sell 8,105 blankets.
Frequently asked questions about calculating target profit
Reviewing the responses to the following frequently asked questions will help you learn more about target profit, CVP analysis, and other related metrics and concepts:
What are the various methods for calculating target profit?
Most businesses determine their target profit using either of two formulas:
Is target net profit different from target profit?
There is no distinction between target net profit and target profit for the majority of businesses. Many businesses use these two terms interchangeably to refer to the sum of money they anticipate making in a specific period of time.
Whats the benefit of calculating target profit?
Companies that use this metric can gain a variety of advantages from calculating target profit, including:
What is a target profit?
A profit target is a set price at which an investor will close a position with a profit. Investors and technical traders use profit targets as part of many trading strategies to manage risk, and the target can be set using a variety of techniques or criteria.
How do you calculate target profit after tax?
Simply multiply the hourly line target by the shift hours to determine the daily production target for a line.
What is the profit formula?
Profit is revenue minus expenses. For gross profit, you subtract some expenses. For net profit, you subtract all expenses. Operating and gross profits are first steps toward achieving net profits.