Enter the contribution margin (%), total revenue, and total fixed costs into the calculator to determine the operating profit (target profit). You can also leave exactly one field blank to calculate that value.

Target Profit Calculator

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Target Profit Formula

The following formula is used in cost–volume–profit (CVP) analysis to relate sales (revenue), contribution margin, fixed costs, and operating profit (often called “target profit” when used as a goal).

TP = R*CMR - FC

Formula source:  San Mateo Community College District – Chapter 6: Cost–Volume–Profit (CVP) Analysis

  • Where TP is the target (operating) profit ($)
  • R is the total revenue ($)
  • CMR is the contribution margin ratio (unitless). If you have Contribution Margin (%), then CMR = Contribution Margin (%) ÷ 100.
  • FC is the fixed costs ($)

To calculate profit at a given revenue, multiply revenue by the contribution margin ratio and subtract fixed costs. To solve for the required revenue to reach a target profit, rearrange the formula to R = (FC + TP) / CMR.

Target Profit Definition

A target profit is the profit level a company aims to achieve. In CVP analysis, the target profit is typically used as an input (a goal) to determine the required sales/revenue or units needed, given the contribution margin and fixed costs.

Target Profit Example

How to calculate target profit (CVP)?

  1. First, determine the contribution margin ratio.

    Contribution margin ratio (CMR) is (Revenue − Variable Costs) / Revenue. If you have a contribution margin percentage, divide by 100 to convert it to a ratio.

  2. Next, determine the total revenue (sales).

    Calculate the total revenue generated by the business (or the revenue you want to test/plan for).

  3. Next, determine the total fixed costs.

    Calculate the total fixed costs for the business or segment.

  4. Finally, calculate (or set) the target profit.

    Use TP = (Revenue × CMR) − Fixed Costs. If TP is your goal, you can instead solve for Revenue: Revenue = (Fixed Costs + TP) / CMR.

FAQ

How do you determine a good contribution margin for setting a target profit?
A good contribution margin varies by industry and business model. In general, a higher contribution margin means each dollar of sales contributes more toward covering fixed costs and profit. Research industry benchmarks and use your own variable-cost structure to set a realistic contribution margin.

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.

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