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

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Problems with Target Income Sales

While the target income sales concept can be useful for planning purposes, you should be aware of several issues, which are as follows:

Contains unrealistic assumptions. This approach assumes that all prices and costs will remain fixed through the budget period, which may not hold true.
Assumes linear relationships. The concept presumes a linear relationship between sales, costs, and revenue, ignoring economies of scale, discounts, or cost changes at different production levels.
Ignores market dynamics. Target income sales does not consider changes in market demand, customer behavior, or competition, which can significantly impact actual sales.
Oversimplifies the budget. External factors like economic downturns, regulatory changes, or supply chain disruptions are not factored into the target income sales concept. Also, seasonal variations in sales and costs are often ignored, leading to inaccurate predictions.
Creates an excessive focus on profit. This approach often prioritizes immediate profit targets over sustainable growth, brand building, or innovation.
Impacts resource allocations. The focus on target income might lead to suboptimal allocation of resources, either underusing or overburdening production capacity. In addition, resources diverted to meet sales targets might detract from other profitable ventures or investments.
Ignores cash flows. The concept focuses on profitability but does not ensure sufficient cash flow to cover operational needs or investments.
Not useful in dynamic environments. In industries with fast-changing technologies or market conditions, static target income goals can quickly become obsolete.