Final answer:
Target profit is the income a company aims to achieve above the break-even point, serving as a goal for profitability and guiding business planning. It involves considering total revenue and average costs to find a profitable price point that aligns with the target.
Step-by-step explanation:
Target profit refers to the income a company would like to achieve above and beyond the break-even point. It is not the income earned at the break-even point, nor is it based solely on a company’s operating leverage, and it is not the same as a company’s current income.
Instead, it is a goal set for expected profitability and is essential for business planning and strategy.
Every business, regardless of its size, strives to earn a profit, which is calculated as Total Revenue - Total Cost. Total revenue is the income a company generates from selling its products,
which can be calculated by multiplying the product's price by the quantity of output sold. Calculating average cost helps the firm assess whether it can earn profits given the current market price, which contributes to determining the profitable price point for achieving the target profit.