Enter the gross margin (%), total revenue, and total fixed cost into the calculator to determine the target profit.
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Target Profit Formula
The following formula is used to calculate a target profit.
TP = R*GM - FC
- Where TP is the target profit ($)
- R is the total revenue ($)
- GM is the gross margin
- FC is the fixed cost ($)
To calculate the target profit, multiply the revenue by the gross margin, then subtract the fixed costs.
Target Profit Definition
A target profit is defined as the profit that a company wishes to achieve through total revenue, gross margin, and fixed cost.
Target Profit Example
How to calculate target profit?
- First, determine the gross margin.
Determine the average margin the business earns as a percentage of the cost to revenue.
- Next, determine the total revenue.
Calculate the total revenue generated by the business.
- Next, determine the total fixed costs.
Calculate the total fixed costs for the business or segment.
- Finally, calculate the target profit.
Using the formula calculate the target profit.
FAQ
How do you determine a good gross margin for setting a target profit?
A good gross margin varies by industry but typically, a higher gross margin indicates a more profitable company. Research industry averages and consider your costs to determine a competitive and realistic gross margin for your business.
Can target profit calculations help in pricing strategies?
Yes, understanding your target profit can significantly influence your pricing strategy. By knowing how much profit you aim to make, you can set prices that cover your costs, maintain a healthy margin, and remain competitive in the market.
Is it possible to adjust the target profit after setting it initially?
Absolutely. Businesses often adjust their target profits based on market conditions, changes in costs, or shifts in strategy. It’s important to regularly review and adjust your financial goals to ensure they remain realistic and achievable.
