Target income sales is the revenue level needed to attain a budgeted profit level. The calculation is derived from breakeven analysis, and is stated as follows:
(Fixed costs + Target income) ÷ Contribution margin percentage
For example, 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
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.