Difference between the Actual Profit and Target Profit

Added on - Sep 2019

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Sales Management1
Task 1Training workbook for the members of sales teamTarget ProfitabilityTarget profit is the budgeted profit that is decided by the management of the organization toachieve by the end of the fixed period. Sometimes it is achieved easily and sometimes it doesn’t.The difference between the actual profit and the target profit is known as variance in the profitand it is the responsibility of the management to how to reduce the variance. The target profit iscomes from the process of budgeting and after that it is compared with the actual income inprofit and loss account (Gleason, et. al., 2013). The target profit of an organization can becalculated by using the formula of CVP analysis. The formula for the cost volume price analysisis as follows:Fixed Cost + Target Profit / Contribution per unitLifetime Value Cash FlowCustomer life time value is a prediction of the net profit attributed to the entire futurerelationship with a customer. It can also be understand as the value of money in the terms ofcustomer relationship (Sadgrove, 2016). It is based on the present value of the budgeted cashflow from the customer relationship. It is an important concept and it shows a limit that needsspending to acquire new customers.Customer period of time price (LTV) is that the expected profit you realize from sales to aspecific customer within the future. It’s primarily based totally on the customer’s expectedretention and spending rate.Customer time period price has intuitive charm as a selling conception, as a result of in theory itrepresents precisely what quantity every client is price in financial terms, and thus precisely whatquantity a selling department ought to be willing to pay to amass every client, particularly indirect response selling (Bol & Lill, 2015).2
Lifetime price is usually accustomed decide the appropriateness of the prices of acquisition of aclient. As an instance, if a brand new client prices $50 to amass (COCA, or price of clientacquisition), and their time period price is $60, then the client is judged to be profitable, andacquisition of further similar customers is suitable.Variable CostVariable cost is that cost which changes with change in the volume. It changes with the changesin the production output of a product. If the production of an organization increases then thevariable cost increases and if the production volume of an organization decreases then thevariable cost decreases. Some of the examples of the variable cost are the direct material cost,direct labor cost, variable overhead (Chang, et. al., 2012). Profitability of an organization affectsfrom the different type of variable cost. One of the types of variable cost is semi variable cost.The formula for calculating the variable cost of a product is as follows:Variable cost = Total cost – Fixed CostVariable cost = Sales – ContributionFixed CostFixed cost is that cost which does not change with the change in volume and remains same. Forexample; if the company produces 1000 units of product X the fixed cost of the company is 20.And the company produces 1200 units the fixed cost also remains same i.e 20. The fixed costchanges when there is a change in the capacity.A fixed cost is associate expense or value that doesn't amendment with a rise or decrease withinthe variety of products or services made or oversubscribed. Fixed cost is expenses that ought tobe paid by an organization, freelance of any endeavor (Wu, et. al., 2016). It’s one in every of the2 elements of the whole cost of running a business, the opposite being variable cost.3
For Example:Sales made by the company x = 10000 unitsSelling price = 15Variable cost = 10 per unitFixed cost = 20000Sales made by the company y = 15000 unitsSelling price = 17Variable cost = 13 per unitFixed cost = 35000ParticularsCompany XCompany YVolume1000015000Selling Price1517Sales150000255000(-) Variable Cost100000195000(10000*10)(15000*13)Contribution5000060000(-) Fixed Cost2000035000Target Profit30000250004
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