Accountants Profit Target Formula
Learn how to calculate the sales revenue needed to cover fixed and variable costs and achieve a target operating profit.
The Accountants Profit Target Calculator uses contribution margin analysis to estimate the revenue required for a chosen pre-tax operating profit. It helps translate a profit goal into a sales target by allowing for fixed costs and the variable cost percentage of revenue.
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Required Revenue for Target Profit
Where:
First add fixed costs to the desired operating profit. Then divide that total by the percentage of each sales amount left after variable costs.
Variables Explained
| Variable | What It Means | Unit |
|---|---|---|
| R - Required revenue | Revenue needed in the period to cover fixed costs and reach the target operating profit. | currency |
| F - Fixed costs | Period costs that are assumed not to change directly with sales volume. | currency |
| P - Target operating profit | The pre-tax operating profit the business aims to achieve for the period. | currency |
| V - Variable cost percentage | Variable costs expressed as a percentage of revenue. | percent |
| CM - Contribution margin rate | The share of revenue remaining after variable costs, expressed as a decimal. | N/A |
| CR - Current or forecast revenue | Expected revenue for the same period, used to estimate the remaining sales shortfall. | currency |
Step-by-Step Calculation
Identify variable costs as a percentage of sales
Use the estimated share of revenue spent on costs that move with sales, such as materials, commissions, delivery, or payment fees.
V = variableCostPercent
Calculate the contribution margin percentage
This is the percentage of each sales amount available to cover fixed costs and then contribute to operating profit.
contributionMarginPercent = 100 - V
Convert the contribution margin to a rate
Divide the percentage by 100 so it can be used in the revenue formula.
CM = contributionMarginPercent / 100
Calculate total contribution needed
The business needs enough contribution after variable costs to pay fixed costs and leave the target profit.
totalContributionNeeded = F + P
Calculate required revenue
Divide the required contribution by the contribution margin rate to find the sales target.
R = totalContributionNeeded / CM
Estimate variable costs at the target revenue
This estimates the variable expenses expected when the required revenue level is reached.
requiredVariableCosts = R * (V / 100)
Calculate the revenue shortfall and forecast profit
Compare required revenue with forecast revenue and estimate operating profit at the forecast sales level.
additionalRevenueNeeded = max(0, R - CR); forecastOperatingProfit = CR * CM - F
Example: annual revenue needed for a profit target
Contribution margin percentage
100% - 40%
60%
Contribution margin rate
60 / 100
0.60
Contribution needed
$150,000 + $100,000
$250,000
Required revenue
$250,000 / 0.60
$416,666.67
Variable costs at target revenue
$416,666.67 × 40%
$166,666.67
Additional revenue needed
max(0, $416,666.67 - $300,000)
$116,666.67
Forecast operating profit
$300,000 × 0.60 - $150,000
$30,000
Final Result
The business needs estimated revenue of $416,667 to achieve a $100,000 operating profit. Based on forecast revenue of $300,000, it needs approximately $116,667 in additional revenue.
Assumptions
- ✓The target profit is pre-tax operating profit for the same period as the revenue and cost inputs.
- ✓Variable costs remain at the same percentage of revenue across the relevant sales range.
- ✓Fixed costs remain unchanged within the expected activity range.
- ✓Revenue, costs, and the profit target use the same currency and reporting period.
- ✓Financing costs, tax, exceptional items, and working-capital movements are excluded unless already included in the figures entered.
Limitations
- !Actual sales mix can change the average variable cost percentage and contribution margin.
- !Discounts, returns, bad debts, and price changes can cause actual revenue and profit to differ from the estimate.
- !Some costs are semi-variable or step-fixed and may rise once sales pass a capacity threshold.
- !The calculation estimates revenue required, not the timing, probability, or cash collection of those sales.
Common Mistakes to Avoid
Entering annual fixed costs with a monthly profit target or revenue forecast.
Using gross margin when it excludes costs that actually vary with sales, such as fulfilment or merchant fees.
Treating all payroll costs as fixed when some wages, overtime, or contractor costs rise with activity.
Entering a variable cost percentage as a decimal value such as 0.40 instead of 40%.
Forgetting to include expected discounts, refunds, commissions, or sales-related delivery costs.
Assuming a higher sales target can be achieved without adding staff, capacity, or other fixed costs.
Related Formulas
Frequently Asked Questions
What is the formula for revenue needed to achieve a target profit?
Required revenue equals fixed costs plus target operating profit, divided by the contribution margin rate. The contribution margin rate is 1 minus the variable cost rate.
How is contribution margin calculated?
Subtract the variable cost percentage from 100%. For example, variable costs of 40% produce a contribution margin of 60%.
Is this the same as a break-even formula?
It uses the same contribution-margin approach, but break-even sets target profit to zero. A profit target adds the desired operating profit to fixed costs.
What happens when variable costs increase?
A higher variable cost percentage reduces the contribution margin, so more revenue is needed to cover fixed costs and achieve the same profit target.
Can required revenue be lower than current revenue?
Yes. If forecast revenue is above required revenue, the additional revenue needed is shown as zero, although actual profit still depends on the assumptions holding true.
Does the formula include tax and interest?
No. The calculation is designed for pre-tax operating profit and normally excludes tax, financing costs, and exceptional items unless they are included in the costs entered.
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