Target profit
Target-profit analysis calculates the sales needed to cover fixed costs and earn a specified profit under the CVP assumptions. Required units = (fixed costs + target profit) ÷ contribution per unit. Required revenue uses the contribution-to-sales ratio instead. The result is a planning requirement, not evidence that the market will buy that quantity. Check capacity, tax assumptions if supplied and any stepped cost arising at the target volume.
Worked example
Fixed costs $20,000 plus target profit $10,000, divided by $5 unit contribution, require 6,000 units before any capacity-related change.
Common mistake
Do not divide only the target profit by contribution and forget the fixed costs that must also be covered.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | PM | Direct | September 2026–June 2027 |