Target Profit Sales Calculator

Understanding the target profit sales calculator — concept and principle

This calculator tells you how much revenue a business must bring in to cover all of its fixed costs and still earn a chosen operating profit. Owners use it to set sales goals or test whether a new product line is realistic. It works with any currency; the example uses US dollars.

How it is calculated

Required revenue = (fixed costs + target operating profit) ÷ contribution margin ratio.

• Fixed costs: costs that do not change with volume in the period, such as rent, salaries, insurance and software subscriptions.
• Target operating profit: the profit before interest and tax you want left over.
• Contribution margin ratio (CMR): the share of each sale left after variable costs, in percent. CMR = (price − variable cost per unit) ÷ price.

The calculator divides by CMR/100, so 40 means 0.40.

The principle

This is cost-volume-profit (CVP) analysis. Every dollar of sales first pays for its own variable costs (materials, commissions, card fees). What remains, the contribution margin, is the money available to pay fixed costs and then create profit. If 40 cents of every dollar is contribution, you need enough dollars so that 40% of them equals fixed costs plus the profit you want. Setting the target profit to zero gives the familiar break-even revenue. It assumes price, variable-cost share, fixed costs and sales mix stay constant.

Worked example

1. Fixed costs are $20,000 and the target operating profit is $10,000, so contribution needed = $30,000.
2. The contribution margin ratio is 40%, or 0.40.
3. Required revenue = $30,000 ÷ 0.40 = $75,000.00.
4. Check: 40% of $75,000 is $30,000 of contribution, which pays the $20,000 of fixed costs and leaves $10,000 of profit.

How to read the result

Compare the required revenue with your current or forecast sales. If it is far above anything you have achieved, you can lower fixed costs, raise prices, cut variable costs (which raises CMR) or accept a smaller profit target. Because CMR sits in the denominator, small changes matter: at 30% instead of 40% the same goal needs $100,000 of sales.

Common mistakes

• Using gross margin instead of contribution margin; gross margin often includes fixed overhead.
• Entering the profit you want after tax; this model uses operating profit before tax.
• Assuming one CMR when products with very different margins are sold in a shifting mix.

Frequently asked questions

How do I find my contribution margin ratio?

Take revenue minus all variable costs for a period and divide by revenue. For one product, use (price − variable cost per unit) ÷ price.

What if I want a target profit after tax?

Convert it first: pre-tax profit = after-tax profit ÷ (1 − tax rate), then enter that figure as the target operating profit.

Is this the same as the break-even point?

Break-even is the special case with a target profit of zero. Here that would be $20,000 ÷ 0.40 = $50,000.

Sources: Horngren, Datar & Rajan, Cost Accounting: A Managerial Emphasis (Pearson), chapter on cost-volume-profit analysis