Sale department will be notified about their target sale to support target profit. Target net income is the best method which we use to make the connection between shareholder/top management and the other departments. So the company will be able to get a net operating income of $ 285, 714, and net income of $ 200,000. It means that Company ABC needs to sell 9,761 units to achieve a contribution margin of $ 585,714. Sale quantity = Total Contribution / Contribution per unit Net Operating Income = 200,000/70% = $ 285,714 Second, calculate target contribution marginĬontribution Margin – Fixed Cost = Net operating IncomeĬontribution Margin = Net Operating Income + Fixed CostĬontribution Margin = $ 285,714 + $ 300,000 = $ 585,714 Finally, calculate the target sale quantity Net Operating Income = Net Income / (1 – 30%) Target Operating Income = Net Income/(1 – Tax rate) The target net income is $ 200,000, and the variable and fixed costs are: Description Amount Selling Price $ 100 Variable Cost $ 40 Fixed Cost $ 300,000 Tax rate 30% Solution First, we need to calculate the Net operating income. \ ExampleĬompany ABC is preparing a budget for each department after the board of directors had set the target net income for next year.
Target Sale quantity Target Net Income Formula.Sale departments must know about their target, production department needs to ensure that the variable cost must be within the control and the so on. But as the management account, we have separated all the figures in order to bring a clear message to all departments. The top managements may have no interest in all the figures here, they just want the company to reach a certain of net income during the year. Account Name Amount Sale 000 Variable Cost (000) Contribution Margin 000 Fixed Cost (000) Operating Income 000 Tax on Profit (000) Net Income 000 Before achieving target net income, we need to hit the sale target, budgeted variable cost, and fixed cost. It is usually called the cost-profit analysis. In order to complete the target, the company needs to understand the relationship between variable cost, fixed cost, and selling price. We can not just set the target net income alone as it has a close relationship with sales, variable cost, and fixed cost. At the beginning of the year, each company prepares the annual budget, which is the target for company to achieve during the year. It is the goal for company to achieve in a year. Target net income is the target profit that top management or shareholders set for the company to achieve in an accounting period.
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