Target Income Sales
In cost-volume-profit analysis, target income sales is the amount/units of sales needed to cover the variable costs, fixed costs and the target income in a given accounting period. Target income is the net income which a company wants to achieve during the period.
Every business wants to be able to not only cover the variable and fixed costs, but to be able to generate some return on its investment. Finding target sales is an important part of the decision-making process.
|Target Income Sales in Units =||Fixed Costs + Target Income|
|Contribution Margin per Unit|
|Target Income Sales in Dollars =||Fixed Costs + Target Income|
|Contribution Margin Ratio|
Alternatively, target income sales in dollars may be calculated as:
Target Income Sales in Dollars = Revenue per Unit × Target Income Sales in Units
|Contribution Margin per Unit =||Sales − Variable Costs|
|Number of units|
|Contribution Margin Ratio =||Sales − Variable Costs|
Orange Juices Inc. is a company engaged in packaging and distribution of fresh orange juices. Its revenue per liter of juice is $10. Its manufacturing costs are as follows:
|Costs of raw oranges used per liter||$2|
|Direct labor costs||1|
|Fixed manufacturing overheads||200,000|
|Fixed administrative and distribution costs||300,000|
The company wants to generate net income of $150,000 at least. Determine how many liters the company should be able to sell and the amount of total sales.
Contribution margin per unit = $10 − $2 − $1 = $7
Contribution margin ratio = $7 ÷ $10 = 70%
Target income sales in units = ($200,000 + $300,000 + $150,000) ÷ $7 = 92,857
Target income sales in dollars = ($200,000 + $300,000 + $150,000) ÷ 70% = $928,571
Target income sales can also be determined as product of per unit sales revenue and target income sales in units i.e. ($10 × 92,857 = $928,571)
Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork