# How to Work Backwards from a Profit Target to a Selling Price

To work backwards from a profit target, add the target profit to the fixed costs that must be covered, divide by expected sales volume, and add variable cost per unit. The result is the selling price required under those assumptions. If some variable costs are percentages of selling price, adjust the equation to allow for them.

The calculation converts an ambition into a testable proposition. It does not establish that buyers will accept the price or that the planned volume is attainable. The next step is to challenge both together.

## Specify the profit target precisely

An illustrative Ahmedabad business sells reusable display stands. Management wants ₹1,20,000 operating profit next month after ₹1,80,000 fixed operating costs. It expects to sell 600 stands and estimates variable production and fulfilment cost of ₹900 per stand.

Required total contribution is ₹3,00,000: ₹1,80,000 fixed costs plus ₹1,20,000 profit. Dividing by 600 gives required contribution of ₹500 per stand. Adding ₹900 variable cost gives a required selling price of ₹1,400 before separately handled taxes.

ICAI's marginal costing model links contribution with fixed costs and profit. Keep the definition of profit consistent with the cost list. If the target is after interest, include the relevant interest amount. An after-tax target requires a separate, transaction-appropriate tax assessment rather than pretending the operating formula determines it.

## Check the full result

| Illustrative monthly item | Calculation | Amount |
|---|---|---:|
| Sales revenue | 600 × ₹1,400 | ₹8,40,000 |
| Variable costs | 600 × ₹900 | ₹5,40,000 |
| Contribution | Revenue less variable costs | ₹3,00,000 |
| Fixed operating costs | Planned amount | ₹1,80,000 |
| Operating profit | Contribution less fixed costs | ₹1,20,000 |

If the same business sells only 500 stands at ₹1,400, contribution is ₹2,50,000 and operating profit ₹70,000. The ₹50,000 shortfall follows directly from 100 fewer units at ₹500 contribution each. A target price cannot protect profit when the expected quantity is missed.

At 500 expected units, the required price would instead be ₹900 plus ₹3,00,000 divided by 500, or ₹1,500. That higher price may itself reduce demand, so the planning exercise needs a price-volume discussion rather than a one-cell answer.

## Include fees linked to selling price

Suppose a selling agent takes 5% of revenue, in addition to the ₹900 unit cost. For 600 units, each sale still needs ₹500 contribution after the fee. Price less 5% of price must therefore equal ₹1,400.

Required price becomes ₹1,400 divided by 0.95, or approximately ₹1,473.68. At that price, the agent receives about ₹73.68 and the business retains ₹1,400 before paying the ₹900 other variable cost. Simply adding 5% to ₹1,400 would give ₹1,470 and slightly understate the required price.

List each fee's base carefully. A charge on invoice value, a flat order-processing amount and a unit freight charge behave differently. Build the calculation using the actual commercial terms rather than a single approximate “selling expense” percentage.

## Test whether the business can deliver the plan

Confirm that materials, people and equipment can support 600 saleable stands. If capacity is only 500, identify the cost of overtime or outsourcing before retaining the 600-unit assumption. Additional volume can require another fixed cost step, changing the required contribution.

Check customer demand at the required price using recent quotes, order conversion and comparable specifications. A competitor's lower price may reflect different quality, payment terms or cost structure. Compare the actual customer offer, then decide whether to adjust price, scope, channel or the profit target.

If the market supports only ₹1,350, contribution before any sales-based fee is ₹450. To earn ₹1,20,000 after ₹1,80,000 fixed costs, the business would need 666.67 units, so at least 667 whole units. Test that volume against capacity and demand rather than assuming the gap will disappear through harder selling.

## Make uncertainty visible

Prepare a small table using several credible volume and unit-cost estimates. A ₹50 rise in variable cost increases the required price by ₹50 when there are no percentage-based fees and all other assumptions stay unchanged. A fall in volume spreads the required contribution over fewer units and has a different effect.

State how long supplier rates and customer prices remain valid. If the order spans several months, build the target over that period and include the fixed costs attributable to it. Do not compare an annual profit objective with one month's sales quantity.

## What if management chooses a revenue target first?

At 600 stands and a ₹1,400 price, the required revenue is ₹8,40,000. Setting that revenue target alone leaves the quantity and price combination unresolved. Selling 700 stands at ₹1,200 produces the same ₹8,40,000 revenue but only ₹2,10,000 contribution at ₹900 variable cost, leaving ₹30,000 after fixed costs.

The original plan earned ₹1,20,000. Equal revenue therefore does not imply equal profit when unit volumes and price differ. Keep the quantity, price and variable-cost assumptions attached to the revenue target, and assess sales incentives against the contribution those combinations actually produce.

## Use the result to choose an action

The required price is valuable even when it is commercially unrealistic, because it identifies the size of the problem. Management can examine material redesign, reduced setup work, different customer segments, better capacity use or a revised target. Each option should change a specific input and show the resulting price.

Approve a final plan with a named sales volume, price, variable-cost assumption and review date. Compare realised contribution with the target as orders arrive. Working backwards turns “we need more profit” into a clear choice about what must change and whether the business can credibly make that change.

Keep owner drawings outside this operating-profit formula unless they are actual expenses on the chosen accounting basis. A cash withdrawal target belongs in the cash plan; confusing it with operating cost can lead to an incorrectly defined pricing objective.

## Sources and references

- [ICAI: Marginal Costing](https://resource.cdn.icai.org/74757bos60489-cp14.pdf)