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Thread: Profit Calculation Equation

  1. #1

    Question Profit Calculation Equation

    I am trying to create an formula to solve a mathematical problem with profit calculation. I am not sure if it is possible. I have an offer price, a bunch of expenses, an expense total and a profit target. From that I want to work out how much to pay for the real estate site to achieve a percentage of profit based on expenses. ie. profit target is X% of expenses. I need to know what is the maximum you can pay for the site. I will post an example of the information I have here:

    Purchase Offer price = $500000.00.
    Total Costs = $751654.11 (one of these expenses if offer price so as offer price lowers expenses drop).
    Profit Target is X% of Total Costs - where X=20% Profit Target = $155319.90
    Total Sales Are $850000.00
    Net Profit is $73430.48
    Total Profit % achieved = 9.46%

    I need to work out the maximum to pay for the site to achieve X% profit (in this case 20% profit). I am not sure if we have enough information to build an equation. The problem being as the purchase offer price drops this changes total costs which changes net profit and net profit percentage. So it seems to be a circular reference. The way i approached it was to work out with other formulas what happens to each part of the equation as the offer price drops. So I worked out the following as a starting point:

    For every $1 that your purchase offer price drops by profit increases by $1.06889 (taking into account gst).
    At the same time for every $1 drop in offer price total costs (made up of costs including offer price) decreases by $0.0683.
    For every $1 drop in offer price profit target decreases by $0.214.

    So to make a 20% profit what is the maximum I can offer for the property. I can provide more detailed information like other formulas etc. if needed so feel free to email me or request more information here. Thanks for reading and offering your opinion. Kind Regards, Craig

  2. #2

    reply to our reply


    The reasons we are dealing with cents when talking hundreds of thousands of dollars is because the items that make up the expenses change when the offer price to purchase changes because the offer price is one of the expenses. If we don't allow for all changes we'll never get to the true figure of what the maxiumum is that we can pay for the site. And when we are talking about cents - as explained - that is the amount the expenses change per $1. Of the offer prices is dropped by $200000 those cents become a much bigger number and total expenses (or total costs) change a lot.

    As for (one of these expenses if offer price so as offer price lowers expenses drop) - there was a typo. What I meant was on of the expenses (or costs) IS the offer price so as the offer price decreases expenses lower. And they lower by the amounts specified in the first post per $1 that the offer price decreases by. I know it's complicated and probably even counter intuitive but I am trying to simply work out if we pay a certain amount for the site and add other costs to get total costs and we a profit of a certain percentage based on sale price less costs then what do we need to pay for the site to make that profit percentage 20%. I am trying to state it as best as I can and I thank you for at least taking a look at it. Kind Regards, Craig.

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