Calculating Target Profit is not that difficult. And, it is possible to use the Break-even Chart to find out the level of sales that the business needs to earn a certain amount of Target Profit.
Target Profit can also be worked out both using the Beak-even Chart, if the chart is clear enough, and by calculating it manually using two different ways.
Method 1 of Calculating Target Profit: Sales Revenue = Total Costs (TC)
It is possible to calculate Target Profit using the basic yet the most important business formula, the formula for profit where Profit equals to Sales Revenue – Total Costs (TC).
Target Profit = Sales Revenue – Total Costs (TC)
Target Profit = Price x Quantity – [Fixed Costs (FC) + Total Variable Costs (TVC)]
Target Profit = Price x Quantity – [Fixed Costs (FC) + Average Variable Cost (AVC) x Quantity]
Method 1 of Calculating Target Profit: Sales Revenue = Total Costs (TC) A sole trader sells dresses at the price of $260. The Average Variable Costs (AVC) to produce one dress are USD$120 per unit. The Fixed Costs (FC) for renting a workshop and paying interest on the bank loan are USD$3,500. The sole trader wants to earn Profit of USD$5,600. Question: How many dresses does she need to sell in order to earn this amount? Target Profit = Price x Quantity – [Fixed Costs (FC) + Average Variable Cost (AVC) x Quantity] USD$5,600 = USD$260 x Quantity – [USD$3,500 + USD$120 x Quantity] Quantity = 65 So, the Target Profit output is 65 units. Answer: The sole trader needs to sell 65 dresses in order to earn Target Profit of USD$5,600.
Method 2 of Calculating Target Profit: Total Contribution
It is quicker to calculate Target Profit using the Total Contribution formula than to use the alternative profit formula where Profit = Sales Revenue – Total Costs (TC). So, the Total Contribution method can also be used to work it out.
Profit = Total Contribution – Fixed Costs (FC)
Specifically, Total Contribution is simply Contribution Per Unit multiplied by the Quantity produced and sold:
Total Contribution = Contribution Per Unit x Quantity
Or:
Total Contribution = [Price – Average Variable Cost (AVC)] x Quantity
So:
Profit = [Price – Average Variable Cost (AVC)] x Quantity – Fixed Costs (FC)
Method 2 of Calculating Target Profit: Total Contribution A sole trader sells dresses at the price of $260. The Average Variable Costs (AVC) to produce one dress are USD$120 per unit. The Fixed Costs (FC) for renting a workshop and paying interest on the bank loan are USD$3,500. The sole trader wants to earn Profit of USD$5,600. Question: How many dresses does she need to sell in order to earn this amount? Profit = Total Contribution – Fixed Costs (TFC) Fixed Costs (FC) = USD$3,500 Total Contribution = Contribution Per Unit x Price – Quantity Total Contribution = [Price – Average Variable Cost (AVC)] x Quantity Profit = [Price – Average Variable Cost (AVC)] x Quantity – Fixed Costs (TFC) USD$5,600 = (USD$260 – USD$120) x Quantity – USD$3,500 USD$9,100 = USD$140 x Quantity Quantity = 65 So, the Target Profit output is 65 units. Answer: The sole trader needs to sell 65 dresses in order to earn Target Profit of USD$5,600.
If the quantity needed to be produced and sold in order to earn the specific Target Profit is a decimal number such as 64.49, then the value should be rounded up to 65. It is because a business cannot sell 0.49 of a product to the customer.
The number should not be rounded down because when 64 products are sold, then the profit earned will be slightly less than the expected Target Profit of USD$5,600.
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