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.

Formulas

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
Sales

Example

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 costs1
Fixed manufacturing overheads200,000
Fixed administrative and distribution costs300,000

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.

Solution

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