Target Profit

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What is Target Profit?

Target Profit is the estimated amount of profit the management hopes to achieve during an accounting period and is forecasted and updated regularly as per the business’s progress.

What is Target Profit?

Target Profit Formula

This formula is derived by evaluating the company's situation to achieve the break-even point where the company can bear the fixed cost of the business expenditure and cover the necessary variable cost. For the same, the revenue that needs to be achieved to attain the target profit can be illustrated as follows;

Where,

Revenue = The Revenue or Sales amount that needs to be achieved to attain the target profit
% of Gross Margins = It denotes the percentage of profit is to be gained from the sales amount

The above formula will provide the sales amount, and if the total sales unit is to be found, then the same formula could be;

Examples

The management of a company named ABC Inc. after finalizing the target profit to be achieved in the next quarter wanted to equate the sales revenue that would be needed. For the evaluation of the revenue required following information is made available. Comment on the sales required.

Target Profit = $ 1400000
Fixed Cost = $ 210000
% of Gross Margin = 70%

By putting these values in this formula we can evaluate the sale revenue required:

= 210000 + 1400000 / 70%
= $2300000

Hence to make a target profit of $ 1400000 in the next quarter, the company needs to make a sale of $ 2300000 with a 70% gross margin.

Target Profit Analysis

Target analysis is a small part of cost volume profit analysis, which is a wider concept. This covers evaluating the sales level or the amount of revenue that needs to be generated to earn a targeted profit after covering the fixed overhead expenditures and variable overhead expenditures in the targeted period. It is the next step for the organizations after the break-even platform where the revenue from the sales is only able to cover fixed & variable overhead without any profit. Still, in the target profit analysis, the company's target is to earn the targeted profit over and above the expenditures.

Advantages

It provides less variation in the actual results compared to the budgeted profit. It tends to be more reliable. As well as the target profit gets updated as per actual results, it becomes more feasible and reliable to use.
It provides a detailed analysis of the business's cost structure, including the fixed cost structure as well as the variable cost structure of the asset. The incorporation of the selling price & cost of the asset for the evaluation of the gross margin percentage also shows the profitability of the company. So, this also helps in the overall evaluation of the company's profit-making capability.
It also helps the management make the decision-making regarding the business operationand s finalize the company's mission and goal for the upcoming periods. This analysis can help in predicting the capability and help in making the decision-making process.

Disadvantages

The variation is less, but the system is open to manual errors or mistakes. As the gross margin calculation and the intakes of the variable overheads are to be incorporated by a person, there are chances of error in calculation, which may lead to inaccurate results or projections.
Since this analysis required updates regularly, this could sometimes become a serious and hectic task for the team.

Conclusion

Overall, the target profit analysis helps the company identify its mission for the targeted period through evaluation of its overheads and profit-making ability. The usage of this method has been increased and adapted from large profit-making companies to the dormant ones. The regular update of the existing scenario helps it be a realistic analysis and more accurate to show low variation compared to actual results.