TARGET PROFIT
Target profit is the estimated amount of profit management expects to achieve over an accounting period and is forecast and updated regularly as the business progresses.
Target Profit Analysis
Target Analysis is a small part of Profit over Cost Volume Analysis, which is a larger concept. This covers assessing the level of sales or the amount of revenue that must be generated to achieve a targeted profit after covering overhead and variable overhead in the target period. This is the next step for organizations after the profitability platform where sales revenue can only cover fixed and variable overheads without any profit, but in target profit analysis, the goal of the business is to earn the targeted profit over and above the expenses.
This formula is derived by assessing the situation of the business so that the business reaches the breakeven point
where the business can bear the fixed cost of business expenses and cover the variable cost required. For the same, the
turnover which must be achieved to achieve the profit target can be illustrated as;
Revenue of sales = fixed cost + target profit
% of gross margin
Where,
Revenue = The amount of revenue or sales must be met to reach the profit target
% of gross margins = Indicates the percentage of profit to be made on the number of sales
Target profit formula
Advantages
Provides less variation in actual results than budgeted benefits. It tends to be more reliable. As the target profit is updated based on actual results, it becomes more feasible and reliable to use.
Provides a detailed analysis of the cost structure of the asset as it includes the fixed cost structure and the variable cost structure of the asset. The incorporation of the selling price and the cost of the asset for the evaluation of the gross margin percentage also shows the profitability of the business. Therefore, it also contributes to the overall assessment of the company’s profitability.
It also helps the management to make decisions regarding business operations and to finalize the mission and purpose of the company for the coming periods. This analysis can help predict capacity and aid in decision-making.
Disadvantages
The variation is minor, but the system is subject to errors or manual errors. Since the gross margin calculation and variable overhead assumptions must be integrated by one person, there are opportunities for errors in the calculation, which could lead to inaccurate results or projections.
As this analysis required regular updates, it could sometimes become a serious and hectic task for the team.
Conclusion
Overall, target profitability analysis helps the business to identify its mission for the target period by evaluating the overhead and profitability of the business. The use of this method has been increased and adapted from large for-profit companies to inactive companies. Regular updating of the existing scenario allows for a realistic and more accurate analysis to show small variations from the actual results.
