How to Calculate Target Profit in Business?

Companies use a variety of financial metrics to help them set and achieve fiscal goals. One calculation that many organizations use to help determine profit potential is the profit target formula.

Knowing how to calculate and apply these metrics is useful for any employee tasked with setting business goals for their company.

In this article, we explain what the profit target formula is, explain how to calculate target profit, offer examples of calculating profit targets, and answer frequently asked questions about this metric and other related financial concepts.


1 What is the profit target formula?
2 How to calculate target profit?

2.1 1. Set a time frame
2.2 2. Determine the contribution margin
2.3 3. Identify fixed costs
2.4 4. Apply the formula
2.5 5. Adjust as needed
3 Example of calculating target profit
4 Frequently asked questions about calculating target profit

4.1 What are the various methods for calculating target profit?
4.2 Is the target net profit different from the target profit?
4.3 What is the advantage of calculating target profit?

What is the profit target formula?

The profit target formula or profit is a calculation used by businesses to estimate how much revenue a company should generate over a certain period of time.

Typically, companies use these metrics to help set budgets, estimate development potential, and optimize investments. Since profit targets are estimates, it’s important to remember that the actual profit your company generates could be higher or lower based on actual sales, expenses, and other factors.

How to calculate target profit?

Many accounting and bookkeeping professionals use target profit calculations to help make effective financial forecasts for their organizations.

There are several approaches to determining profit targets, but the most widely used is cost-volume-profit target analysis, also known as CVP analysis. You can use these steps to determine your organization’s profit targets using CVP analysis:

1. Set a time frame

Start by determining the endpoint and desired profit for your estimated profit target. Some companies like to calculate their profit targets on a quarterly basis, while others do it annually. Once you’ve decided on the exact date and the amount of income you expect to earn by that time, you can set the numbers needed to complete the calculations.

2. Determine the contribution margin

The contribution margin is the price of your product or service after deducting the associated costs of producing or producing that item. The remainder is the profit your organization earns from each unit sold, which is a number you need to know when conducting a CVP analysis to find your profit target.

3. Identify fixed costs

Finally, identify your fixed expenses to calculate your profit target. Fixed costs are costs that your business has to pay regardless of production or sales.

Common examples of fixed costs include rent or mortgage on your workspace, utilities and administrative supplies. This expense affects your overall profit potential, so you should take that into account in the calculation of your profit target.

4. Apply the formula

Once you’ve set a deadline for calculating your target profit, contribution margin, and any fixed costs, you can use the CVP formula to find your target profit:

Sales projection = (target profit + fixed costs) / contribution margin per unit

Plug your numbers into the formula. The total will show you the number of sales you need to make to reach your target profit goal.

5. Adjust as needed

Once you’ve looked at the initial calculations and estimates, you can adjust your desired and intended profit to see how much or less product you need to sell to reach your goals. This formula makes it easy to create several different projections to work with.

Example of calculating target profit

The following is an example of using CVP analysis to find profit targets:

ABC Blankets is a specialty blanket business that makes personalized blankets and sheets for their customers. The company expects to make a third-quarter profit of $140,000.

The business accounting team decided to use CVP analysis to determine how many covers they had to sell to reach their profit goals. They specify the following information:

  • Profit target: $140,000
  • Timeframe: Third quarter
  • Contribution margin: $19 per blanket
  • Fixed costs: $14,000 per quarter

They apply the CVP analysis formula: (target profit + fixed costs) / contribution margin per unit = projected sales

($140.000 + $14.000) / $19 = 8.105

ABC Blankets needed to sell 8,105 blankets during the third quarter to meet their profit target of $140,000.

Frequently asked questions about calculating target profit

Learn more about profit targets, CVP analysis, and other related metrics and concepts by reviewing answers to these frequently asked questions:

What are the various methods for calculating target profit?

Most companies use one of two formulas to calculate their profit targets:

Equation method: This method is useful if you already have access to your company’s individual expenses and goals, because it separates them and combines them in a formula rather than having you do the pre-formula calculations yourself. The equation method uses the following formula:

Variable expenses x number of units to be sold + fixed costs + target profit = selling price per unit x number of units to be sold

Contribution margin method: The contribution margin method, also known as CVP analysis, uses a much simpler formula that requires some up-front calculations to use. It is easier to adjust because it has fewer inputs than the equation method. The contribution margin method uses the following formula:

(target profit + fixed costs) / contribution margin per unit = projected sales

Is the net profit target different from the profit target?

For most companies, there is no difference between a net profit target and a profit target. Many organizations use these two terms interchangeably to describe the amount of money they expect to make in a given time period.

What are the advantages of calculating target profit?

Calculating a profit target provides a number of benefits for companies using this metric, including:

  • Setting goals: Setting profit targets helps organizations establish clear, data-driven action steps to achieve their goals. For example, once companies know how many products they have to sell to reach their profit targets, they can create effective marketing strategies and make hiring decisions that match those goals.
  • Setting a budget: Knowing how much money a company needs to spend on manufacturing, marketing, and other business expenses to achieve profit targets is useful for making realistic budgets and financial forecasts.
  • Identifying resources: Once businesses know how many units they need to produce and sell to achieve their target profit goals, they can allocate resources more accurately to meet those goals.

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