Sp = Sales price per unit.
Q = Number (quantity) of units to be manufactured and sold during the period.
Ve = Variable expenses to manufacture and sell a single unit of product.
Fe = Total fixed expenses for the period.
Tp = Target profit for the period.
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In break-even point analysis article, we used equation method and contribution margin method to calculate break-even point of a company. The same formulas, with a little modification, can be used to calculate the sales both in units and in dollars to earn a target profit during a certain period of time.
Sometime management wants to earn a certain amount of profit during a certain period of time. This certain amount of profit is commonly known as target profit.
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In previous pages of this chapter, we have focused mainly on the break-even point. However, the core objective of every business is not just to break even, but to earn a decent amount of profit.
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Under this method, the target profit is added in the total fixed expenses and the resultant figure is then divided by the unit contribution margin.
Target profit analysis is about finding out the estimated business activities to perform to earn a target profit during a certain period of time. Among these activities, management is especially interested to find out the sales volume required to generate a target profit.
* Unit contribution margin is equal to sales price per unit less variable expenses per unit ., $85 $55.