Target Profit Setter Calculator

Target Profit Setter Formulas

This calculator is based on the Cost-Volume-Profit (CVP) relationship, where the total contribution margin generated must equal the fixed costs plus the desired profit (F).

Core CVP Equation (Used for all calculations)

Formula to Solve for Total Contribution (F)

Formula to Solve for Selling Price (P)

Formula to Solve for Variable Cost (V)

Formula Source: Investopedia – CVP Analysis

Variables Explained

The CVP variables are used to model the relationship between costs, sales volume, and profits:

• **F (Total Available Contribution):** This is the total Contribution Margin available to cover fixed costs and represent net income (profit). $F = \text{Fixed Costs} + \text{Profit}$.
• **P (Selling Price Per Unit):** The unit price, which must be higher than V to generate a Contribution Margin.
• **V (Variable Cost Per Unit):** The cost directly associated with producing one unit.
• **Q (Sales Volume Target):** The number of units expected to be sold.

Related Calculators

Analyze related metrics for comprehensive financial planning:

• Maximum Fixed Cost Calculator
• Unit Contribution Analysis Calculator
• Implied Profit Margin Tool
• Break-Even Sales Projection Calculator

What is the Target Profit Setter Calculator?

The Target Profit Setter Calculator primarily focuses on the ‘F’ variable when P, V, and Q are known. When you enter realistic sales volumes, prices, and variable costs, the calculator determines the total amount of money (Total Contribution Margin) the operation is capable of generating. This figure (F) must first cover all fixed costs; any remainder is the actual net profit.

This tool is invaluable for setting realistic profit targets. Instead of setting an arbitrary profit target and then forcing a high Q or P, this calculator allows management to see what their current or projected operations can organically achieve, thus serving as a benchmark for profitability.

How to Calculate Target Profit (Example)

Let’s find the Total Contribution (F) generated when P=$50, V=$20, and Q=3,000 units. Assume Fixed Costs are $50,000:

1. **Input Variables:** P=$50, V=$20, Q=3,000. F is missing.
2. **Calculate Unit Contribution Margin (CM):** CM = P – V = $50 – $20 = $30.
3. **Solve for Total Contribution (F):** F = Q $\times$ CM = 3,000 units $\times$ $30 per unit = $90,000.
4. **Determine Target Profit:** Profit = Total Contribution – Fixed Costs. If Fixed Costs are $50,000, then Profit = $90,000 – $50,000 = $40,000.
5. **Result:** The operation can support $90,000 in required funds, leading to a **Target Profit of $40,000**.

Frequently Asked Questions (FAQ)

When I solve for F, what exactly does the result represent?

When solving for F, the result represents the **Total Available Contribution Margin** generated by the entered Q, P, and V. This amount is the total pool of money available to cover your fixed costs and generate net profit.

How can I use this calculator to set my fixed costs budget?

If you have a clear profit goal (Target Profit) and solve for F, the resulting F tells you the required Total Contribution. Subtract your Target Profit from this calculated F to find the absolute maximum fixed cost budget you can afford under the given operational plan.

What is the danger of setting Q too high in this calculator?

Setting Q (Sales Volume) too high may result in an artificially large F (Total Contribution). This large F might imply a high profit, but it may not be realistic if the market cannot absorb that high sales volume, or if producing that many units leads to economies of scale issues not captured by the fixed V.

Does this tool account for taxes?

No. The CVP model and the resulting profit (F – Fixed Costs) calculate Operating Income (Earnings Before Interest and Taxes). To calculate Net Income, you would need to subtract interest and taxes from the calculated profit.