How is the target profit in sales dollars calculated?

The calculation of target profit in sales dollars involves understanding the relationship between fixed costs, target profit, and the contribution margin ratio. The contribution margin ratio represents the percentage of sales that contributes to covering fixed costs and profit after accounting for variable costs.

To determine the necessary sales volume to achieve a target profit, you add the fixed costs and the desired target profit together. This sum represents the total amount that needs to be covered by sales. By dividing this total by the contribution margin ratio, you arrive at the sales dollars needed to achieve the target profit. The contribution margin ratio effectively helps translate fixed costs and target profit into the required sales revenue.

This method is essential for understanding how much sales volume is necessary to cover both expenses and desired profits, ensuring effective budgeting and financial planning.