Target Income Sales
Target income sales refers to the total sales revenue that a company needs to achieve in order to meet a specified target income or profit goal. It’s a critical figure for businesses, especially when determining pricing strategies, sales targets, or analyzing potential profitability against sales projections.
To compute the target income sales, the formula is:
Target Income Sales = Total Fixed Costs + Target Income / Contribution Margin Ratio
Where:
- Total Fixed Costs are costs that don’t change regardless of production or sales volume, such as rent or salaries.
- Target Income is the desired profit level.
- Contribution Margin Ratio is calculated as Selling Price − Variable Cost per Unit / Selling Price. It represents the proportion of each sale that contributes to covering fixed costs and profit.
The Contribution Margin Ratio tells you the percentage of each sales dollar that is available to cover fixed costs and provide a profit.
Example of Target Income Sales
Let’s explore a hypothetical scenario involving a coffee shop:
Scenario: Java Junction is a small coffee shop that sells a variety of beverages. One of their popular items is a specialty latte. They wish to find out how much in sales revenue they need from this latte to achieve a target income of $4,000 for the upcoming month.
Here are some details about the specialty latte:
- Selling Price per Latte: $5
- Variable Costs per Latte (ingredients, labor): $2
- Total Fixed Costs for the month (rent, utilities, fixed salaries, etc.): $6,000
Step 1: Determine the Contribution Margin Ratio for the specialty latte.
Contribution Margin per Latte = Selling Price − Variable Cost per Latte
Contribution Margin per Latte = $5 – $2 = $3
Contribution Margin Ratio = Contribution Margin per Latte / Selling Price
Contribution Margin Ratio =$3 / $5 = 0.6
Step 2: Calculate the Target Income Sales.
Target Income Sales = Total Fixed Costs + Target Income / Contribution Margin Ratio
Target Income Sales = $6,000 + $4,000 / 0.6
Target Income Sales = $10,000 / 0.6
Target Income Sales = $16,666.67
So, Java Junction would need to generate sales revenue of $16,666.67 from their specialty lattes in the upcoming month to achieve their target income of $4,000, assuming all other variables remain constant.
Note: This calculation is based solely on the specialty latte sales. If Java Junction has multiple products, each product’s contribution to covering fixed costs and profitability would need to be considered for a comprehensive financial strategy.
