How To Find Target Profit

If you take ready a specific goal for net income, contribution margin analysis can help you effigy out the needed sales. This goal for net income is called target turn a profit.

To compute target profit, just adapt 1 of the 3 net income formulas. Then simply plug target profit into one of these formulas as net income.

For example, say a company is pushing to earn $twenty,000 in profit and has to pay $10,000 in stock-still costs. How much total contribution margin does the company need to generate in gild to make its target turn a profit of $20,000?

Net income = Total contribution margin – Fixed costs

$twenty,000 = Total contribution margin_Target – $10,000

$30,000 = Total contribution margin_Target

Total contribution margin of $30,000 volition result in $20,000 worth of internet income.

At present suppose a visitor has set its target turn a profit for $two,000, earns contribution margin per unit of $five, and incurs fixed costs of $500. How many units must the visitor sell?

If the company wants to earn $two,000 in profit, it needs to sell 500 units.

Consider another company with a contribution margin ratio of 40 percent and fixed costs of $i,000. The company is looking to earn $600 in internet income. How much does that company demand in sales?

Don't confuse dollars with units. The formula that uses contribution margin per unit gives you sales in units. However, the formula that uses contribution margin ratio gives you sales in dollars. To interpret between these units, just multiply or separate by the sales price.