What is Target Income Sales?

Target income sales is the revenue level needed to attain a budgeted profit level. This is a critical number to achieve, since it represents the minimum amount of sales that must be generated in order to achieve a specific profit target. Management may be deeply concerned with meeting the target income sales level, if it has promised outside investors and lenders that a certain profit level will be reached.

How to Calculate Target Income Sales

To calculate target income sales, add together your fixed costs and your target income, and then divide the sum by the contribution margin percentage. Contribution margin is revenues minus all variable costs, divided by revenues. The calculation is derived from a breakeven analysis, and is stated as follows:

(Fixed costs + Target income) ÷ Contribution margin percentage = Target income sales

This calculation can be unreliable if the contribution margin varies significantly by period. The margin can vary when the mix of products changes, when product costs fluctuate, or when management alters product prices.

Example of Target Income Sales

A company's president wants to achieve profits of $100,000. The fixed costs of the firm are $1,200,000 and the average contribution margin percentage (revenues minus totally variable costs) is 45%. The resulting target income sales figure is:

($1,200,000 Fixed costs + $100,000 Target income) ÷ 45% Contribution margin percentage

= $2,888,888 Target income sales