profit planning

Profit planning is a key component of a firm's financial planning and control activities. It involves making decisions about expanding operations and developing new products. This process requires choosing between different production methods, which can affect fixed costs. A higher proportion of fixed costs means a business needs to operate at a higher level before it can start making a profit, and its profits become more sensitive to changes in operational levels.1

Budgetary planning, a part of managerial accounting, establishes performance standards and measures actual results against these plans. The profit plan, a projected income statement, summarizes planned sales revenue, costs, and expenses for a specific period. Companies often prepare flexible budgets to evaluate cost performance at different operating volumes.2