Accounting word of the Week: Target Income Sales

Every year a business owner will create an annual budget for their business. They will list, categorize, and calculate their expenses for each month. They will look over their historical sales data to see how much revenue they think they will achieve each month in the coming year. But that may not be enough.

A business owner may want to calculate how many sales that they need to achieve, in order to meet their target net income. This is known as target income sales, which are an amount required to attain a particular level or target net income.

Target Income Sales computed as:

Fixed Costs + Target Income

Target Income Sales Volume = —————————————————

Unit Contribution Margin

For example, let’s assume that the contribution margin is $50, fixed costs is $100,000, and target income is $200,000. To calculate the target income sales volume = ($100,000 + $200,000) / $50 = 6,000 sales. This means that 6,000 sales will need to be done in order for a business to make a $200,000 profit a year.

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Disclaimer: This blog is for information purposes only and is not intended to provide investing, accounting, tax or legal advice and should not be relied upon.