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Targeted profit

Targeted profit is the profit which the business organization or management desires to gain at the end of the accounting period or business period or it is the amount of the NOI (net operating income). The management should know the essential level of the business operations or activities in order to get target or targeted profits.  CVP or cost volume profit formulas and equations could be used in order to find out the sales volume needed to gain a targeted profit.

In the BEP (breakeven point), cost and sales are exactly the same or equal. Yet, the BEP is not the aim in many of the business organizations. On the other hand, managers of the business organization look for to maximize or increase the profits. Modifying or changing the breakeven point or BEP equation, the volume of sales needed to earn anexpected profit or desired amount of profit could be estimated.  For this reason, the targeted profit factor is included or added to the BEP equation and are as follows:

Sales (Units) is equal to fixed cost plus targeted cost divided by contribution margin per unit.

Sales (units) = Fixed Costs + Target Profit/ Contribution margin per unit

For example, think that the fixed costs are estimated at 200,000 dollars and the targeted profit is 100,000 dollars. The sales unit rate or price and the contribution margin per unit would be as follows:

Unit price of 75 dollars minus Variable unit cost of 45 is equal to Contribution margin of 30 dollars per unit

The sales volume required to gain the targeted profit of 100,000 dollars are 10,000 units.

That is Sales (units) = 200,000 dollars + 100,000 dollars / 30 dollars = 10,000 units.

Questionnaire:

• What is targeted profit?
• What the steps should be taken in order to achieve the targeted profit?

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