9.2 CVP Analysis - Target Income Calculations Flashcards
Total production costs of prior periods for a company are listed as follows. Assume that the same cost behavior patterns can be extended linearly over the range of 3,000 to 35,000 units and that the cost driver for each cost is the number of units produced.
The company is concerned about its current operating performance that is summarized as follows.
Sales ($12.50 per unit) $300,000
Variable costs 180,000
Net operating loss (40,000)
How many additional units should have been sold in order for the company to break even?
A. 16,000 units.
B. 12,800 units.
C. 8,000 units.
D. 32,000 units.
C. 8,000 units.
The breakeven point in units equals fixed costs divided by the difference between unit price and unit variable cost. Fixed costs were $160,000 [($300,000 sales – $180,000 VC) + $40,000 NOL], units sold equaled 24,000 ($300,000 sales ÷ $12.50 SP), and unit variable cost was $7.50 ($180,000 VC ÷ 24,000 units sold). Accordingly, the breakeven point in units was 32,000 [$160,000 FC ÷ ($12.50 SP – $7.50 unit VC)], and the additional units that should have been sold to break even equaled 8,000 (32,000 – 24,000).
A company, which is subject to a 40% income tax rate, had the following operating data for the period just ended:
Selling price per unit $60
Variable cost per unit $22
Fixed costs $504,000
Management plans to improve the quality of its sole product by (1) replacing a component that costs $3.50 with a higher-grade unit that costs $5.50 and (2) acquiring a $180,000 packing machine. The company will depreciate the machine over a 10-year life with no estimated salvage value by the straight-line method of depreciation. If the company wants to earn after-tax income of $172,800 in the upcoming period, it must sell
A. 19,300 units.
B. 21,316 units.
C. 22,500 units.
D. 23,800 units.
C. 22,500 units.
The units to be sold equal fixed costs plus the desired pretax profit, divided by the unit contribution margin. In the preceding year, the unit contribution margin is $38 ($60 selling price – $22 unit variable cost). That amount will decrease by $2 to $36 in the upcoming year because of use of a higher-grade component. Fixed costs will increase from $504,000 to $522,000 as a result of the $18,000 ($180,000 ÷ 10 years) increase in fixed costs attributable to depreciation on the new machine. Dividing the $172,800 of desired after-tax income by 60% (the complement of the tax rate) produces a desired before-tax income of $288,000. Hence, the breakeven point in units is 22,500 [($522,000 + $288,000) ÷ $36].
A manufacturer is considering introducing a new product that will require a $250,000 investment of capital. The necessary funds would be raised through a bank loan at an interest rate of 8%. The fixed operating costs associated with the product would be $122,500, while the contribution margin percentage would be 42%. Assuming a selling price of $15 per unit, determine the number of units (rounded to the nearest whole unit) the manufacturer would have to sell to generate earnings before interest and taxes (EBIT) of 32% of the amount of capital invested in the new product.
A. 35,318 units.
B. 32,143 units.
C. 25,575 units.
D. 23,276 units.
B. 32,143 units.
The manufacturer has determined it must generate EBIT equal to 32% of the capital invested in this project, or $80,000 ($250,000 × 32%). The number of units it must produce to achieve this level of EBIT can be derived as follows:
Breakeven point = (Fixed costs + EBIT) ÷ Unit contribution margin
= ($122,500 + $80,000) ÷ ($15 × 42%)
= $202,500 ÷ $6.30
= 32,142.86 units
Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi’s management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment.
Data associated with each unit of product are presented as follows. Delphi is subject to a 40% income tax rate.
Direct material $ 7.00
Direct labor 3.50
Manufacturing overhead 4.00
Variable manufacturing cost $14.50
Selling expenses 1.50
Total variable cost $16.00
The maximum after-tax profit that can be earned by Delphi Company from sales of the new product during the next fiscal year is
A. $30,000
B. $50,000
C. $110,000
D. $66,000
A. $30,000
Delphi’s breakeven point is 22,500 units ($450,000 fixed costs ÷ $20 UCM). The unit contribution margin (UCM) is $20 ($36 selling price – $16 unit variable costs). At the breakeven point, all fixed costs have been recovered. Hence, pretax profit equals the unit contribution margin times unit sales in excess of the breakeven point, or $50,000 [(25,000 unit sales – 22,500 BEP) × $20 UCM]. After-tax profit is $30,000 [$50,000 × (1.0 – .40)].
Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi’s management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment.
Data associated with each unit of product are presented as follows. Delphi is subject to a 40% income tax rate.
Direct material $ 7.00
Direct labor 3.50
Manufacturing overhead 4.00
Variable manufacturing cost $14.50
Selling expenses 1.50
Total variable cost $16.00
Delphi Company’s management has stipulated that it will not approve the continued manufacture of the new product after the next fiscal year unless the after-tax profit is at least $75,000 the first year. The unit selling price to achieve this target profit must be at least
A. $37.00
B. $36.60
C. $34.60
D. $39.00
D. $39.00
If X represents the necessary selling price, 25,000 equals maximum sales volume, $16 is the variable cost per unit, $450,000 is the total fixed cost, and $125,000 [$75,000 target after-tax profit ÷ (1.0 – .40)] is the desired pre-tax profit, the following formula may be solved to determine the requisite unit price:
25,000 (X – $16) – $450,000 = $125,000
25,000X – $400,000 – $450,000 = $125,000
25,000X = $975,000
X = $39
Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The cost information below relates to the product:
Unit Costs
Direct materials $3.25
Direct labor 4.00
Distribution .75
The company will also be absorbing $120,000 of additional fixed costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product. How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of $14 per unit to gain $30,000 additional income before taxes?
A. 10,700 units.
B. 12,100 units.
C. 20,000 units.
D. 25,000 units.
D. 25,000 units.
The number of units to be sold to generate a specified pre-tax income equals the sum of total fixed costs and the targeted pre-tax income, divided by the unit contribution margin. Unit variable costs total $8 ($3.25 + $4.00 + $.75), and UCM is $6 ($14 unit selling price – $8). Thus, the desired unit sales level equals 25,000 units [($120,000 + $30,000) ÷ $6].
Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The cost information below relates to the product:
Unit Costs
Direct materials $3.25
Direct labor 4.00
Distribution .75
The company will also be absorbing $120,000 of additional fixed costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product. How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of $14 per unit to increase after-tax income by $30,000? Bruell Electronics’ effective income tax rate is 40%.
A. 10,700 units.
B. 12,100 units.
C. 20,000 units.
D. 28,300 units.
D. 28,300 units.
The number of units to be sold to generate a specified pre-tax income equals the sum of total fixed costs and the targeted pre-tax income, divided by the unit contribution margin. Given a desired after-tax income of $30,000 and a tax rate of 40%, the targeted pre-tax income must be $50,000 [$30,000 ÷ (1.0 – .40)]. Unit variable costs total $8 ($3.25 + $4.00 + $.75), and UCM is $6 ($14 unit selling price – $8). Hence, the desired unit sales level is 28,333 [($120,000 + $50,000) ÷ $6]. Rounded to the nearest hundred, the answer is 28,300 units.
Starlight Theater stages a number of summer musicals at its theater in northern Ohio. Preliminary planning has just begun for the upcoming season, and Starlight has developed the following estimated data:
Mr. Wonderful
Average Attendance per Performance: 3,500
Ticket price: $18
Variable Costs: $3
Fixed Costs: $165,000
That’s Life
# of performances: 20
Average Attendance per Performance: 3,000
Ticket price: 15
Variable Costs: 1
Fixed Costs: 249,000
All That Jazz
# of performances: 12
Average Attendance per Performance: 4,000
Ticket price: 20
Variable Costs: 0
Fixed Costs: 316,000
Starlight will also incur $565,000 of common fixed operating charges (administrative overhead, facility costs, and advertising) for the entire season and is subject to a 30% income tax rate.
If Starlight’s management desires “Mr. Wonderful” to produce an after-tax contribution of $210,000 toward the firm’s overall operating income for the year, total attendance for the production would have to be
A. 25,833
B. 20,800
C. 31,000
D. 25,000
C. 31,000
The unit contribution margin on “Mr. Wonderful” is $15 ($18 selling price – $3 unit variable cost). Treating desired after-tax profit as an additional fixed cost allows the target unit sales to be calculated as follows:
Target unit sales
= {Fixed costs + [Target net income ÷ (1.0 – .30)]} ÷ UCM
= [$165,000 + ($210,000 ÷ .70)] ÷ $15
= ($165,000 + $300,000) ÷ $15
= 31,000
A company wants to earn a 6% return on sales after taxes. The company’s effective income tax rate is 40%, and its contribution margin is 30%. If the company has fixed costs of $240,000, the amount of sales required to earn the desired return is
A. $1,000,000
B. $1,200,000
C. $400,000
D. $375,000
B. $1,200,000
The company can calculate its target sales figure as follows:
Net income = Operating income – (Operating income × Tax rate)
.06Sales = .3Sales – $240,000 – [(.3Sales – $240,000) × .40]
.06Sales = .3Sales – $240,000 – .12Sales + $96,000
–.12Sales = –$144,000
Sales = $1,200,000
A company invested $300,000 in a new machine to produce cones for the textile industry. Variable costs are 30% of the selling price and fixed costs are $600,000. The company has an effective income tax rate of 40%. The amount of sales required to earn an 8% after-tax return on its investment would be
A. $891,429
B. $2,133,333
C. $914,286
D. $2,080,000
C. $914,286
The company can calculate its target sales figure as follows:
Contribution margin - Fixed costs = Operating income
Sales - Variable costs - Fixed costs = Return on investment ÷ (1.0 – tax rate)
Sales - .3Sales - $600,000 = .08($300,000) ÷ (1.0 – .40)
.7Sales – $600,000 = $24,000 ÷ .60
.7Sales = $640,000
Sales = $914,286
Oradell Company sells its single product at a price of $60 per unit and incurs the following variable costs per unit of product:
Direct material $16
Direct labor 12
Manufacturing overhead 7
= variable manufacturing costs $35
Selling expenses 5
= Total variable costs $40
Oradell’s annual fixed costs are $880,000, and Oradell is subject to a 30% income tax rate.
A production and sales volume of 4,000 units of product per month would result in an annual after-tax income (loss) for Oradell Company of
A. $(560,000)
B. $56,000
C. $(800,000)
D. $80,000
B. $56,000
The income statement for a volume of 48,000 units (4,000 per month x 12 months) would appear as follows:
Sales ($60 per unit) $2,880,000
Variable manufacturing ($35 per unit) (1,680,000)
Variable selling ($5 per unit) (240,000)
= Contribution margin $960,000
Fixed costs (880,000)
= Income before tax 80,000
Tax expense (30%) (24,000)
= Net income 56,000
A detergent company sells large containers of industrial cleaner at a selling price of $12 per container. Each container of cleaner requires $4.50 of direct materials, $2.50 direct labor, and $1.00 of variable overhead. The company has total fixed costs of $2,000,000 and an income tax rate of 40%. Management has set a goal to achieve a targeted after-tax net income of $2,400,000. What amount of dollar sales must the company achieve in order to meet its goal?
A. $24,000,000
B. $22,000,000
C. $18,000,000
D. $14,400,000
C. $18,000,000
The target net income in units is calculated as follows:
{Fixed costs + [Target net income ÷ (1 – Tax rate)]} ÷ Unit contribution margin
Thus, the number of units required to meet an after-tax income of $2,400,000 is
{$2,000,000 + [$2,400,000 ÷ (1 – 0.4)]} ÷ [$12 – ($4.50 + $2.50 + $1.00)]
= $6,000,000 ÷ $4
= 1,500,000 units
At a selling price of $12.00 per unit, the required dollar sales amount is $18,00,000 (1,500,000 units x $12)
A company is evaluating a risky business opportunity that would require $1,000,000 in fixed costs. Variable cost per unit is $45 and the selling price per unit is $195. The company’s effective income tax rate is 20%. In order to achieve an expected after-tax profit of $1,600,000, the number of units the company will need to sell is’’
A. 10,667
B. 17,443
C. 20,000
D. 13,334
C. 20,000
The solution approach is to treat the desired after-tax profit as if it were a fixed cost. Thus, divide the $1,000,000 of fixed costs plus desired profit by the $150 contribution margin ($195 – $45). Given that the income tax rate is 20%, the $1,600,000 of after-tax profit is equivalent to 80% of the before-tax income. Dividing the $1,600,000 by .8 results in a before-tax profit of $2,000,000. Therefore, the calculation is ($1,000,000 fixed costs + $2,000,000 desired profit) ÷ $150 contribution margin, or 20,000 units. To check that answer, prepare an income statement assuming that sales are 20,000 units at $195 each:
Sales $3,900,000
Variable costs 900,000
Contribution margin $3,000,000
Fixed costs 1,000,000
Before tax income $2,000,000
Income tax 400,000
After-tax income $1,600,000
Kim is thinking of organizing a fundraiser to support a local charity. She has planned to rent a banquet hall and provide the guests with food, entertainment, and various party favors. She has decided to charge $500 a person. After researching around town, Kim has discovered the following costs:
Fixed Costs
Rental fee of banquet hall $150,000
Advertising 50,000
Entertainment 4,000
Variable Costs Per Guest
Food $12
Other miscellaneous costs 8
If Kim’s goal is to raise $10,000 for her charity, how many people must attend the banquet?
A. 446
B. 404
C. 428
D. 425
A. 446
The number of guests Kim must have to raise $10,000 can be calculated as follows:
Target unit sales = (Fixed costs + Target operating income) ÷ UCM
= [($150,000 + $50,000 + $4,000) + $10,000] ÷ ($500 – $12 – $8)
= $214,000 ÷ $480
= 445.83
The statement of income for Dimmell Co. presented below represents the operating results for the fiscal year just ended. Dimmell had sales of 1,800 tons of product during the current year. The manufacturing capacity of Dimmell’s facilities is 3,000 tons of product.The statement of income for Dimmell Co. presented below represents the operating results for the fiscal year just ended. Dimmell had sales of 1,800 tons of product during the current year. The manufacturing capacity of Dimmell’s facilities is 3,000 tons of product.
Dimmell Co.
Statement of Income For the Year Ended December 31, Year 2
Sales $ 900,000
Variable costs:
Manufacturing $315,000
Selling costs 180,000
= (495,000)
Contribution margin $ 405,000
Fixed costs:
Manufacturing $ 90,000
Selling 112,500
Administration 45,000
= (247,500)
Operating income $ 157,500
Income taxes (40%) (63,000)
Net income $ 94,500
Dimmell plans to market its product in a new territory. Dimmell estimates that an advertising and promotion program costing $61,500 annually would need to be undertaken for the next 2 or 3 years. In addition, a $25 per ton sales commission over and above the current commission to the sales force in the new territory would be required. How many tons would have to be sold in the new territory to maintain Dimmell’s current after-tax income of $94,500?
A. ,545.0 tons.
B. 273.333 tons.
C. 307.5 tons.
D. 1,095.0 tons.
C. 307.5 tons.
Given that $61,500 is required for advertising and promotion, these are fixed costs that will have to be covered by the CM for sales in the new market. The CM ratio is 45% ($405,000 CM ÷ $900,000 sales). The UCM for regular sales was $225 ($500 selling price × 45%), and there is a $25 additional variable commission expense for sales in the new territory. The new UCM is $200 ($225 – $25). The new unit contribution of $200 is divided into $61,500 of incremental fixed costs, resulting in additional sales from the new program of 307.5 tons at the breakeven point.
A manufacturer is considering dropping a product line. It currently produces a multi-purpose woodworking clamp in a simple manufacturing process that uses special equipment. Variable costs amount to $6.00 per unit. Fixed overhead costs, exclusive of depreciation, have been allocated to this product at a rate of $3.50 a unit and will continue whether or not production ceases. Depreciation on the special equipment amounts to $20,000 a year. Fixed costs are $18,000. The clamp has a selling price of $10 a unit. Ignoring tax effects, the minimum number of units that would have to be sold in the current year to break even on a cash flow basis is
A. 36,000 units.
B. 20,000 units.
C. 5,000 units.
D. 4,500 units.
D. 4,500 units.
The BEP in units is equal to fixed costs divided by the unit contribution margin ($10 unit selling price – $6 unit variable cost). Accordingly, the number of units that must be sold to break even on continuation of the product line is 4,500 [$18,000 fixed costs ÷ ($10 – $6)]. Fixed overhead allocated is not considered in this calculation because it is not a cash flow element and is incurred regardless of the decision.
The budget data for the Bidwell Company appear below.
Sales (100,000 units) $1,000,000
Costs:
Direct materials
Fixed: $0
Variable: $300,000
Direct labor
Fixed: 0
Variable: 200,000
Manufacturing overhead
Fixed 100,000
Variable 150,000
Selling and administrative costs
Fixed 110,000
Variable 50,000
Total costs
Fixed $210,000
Variable $700,000
Total 910,000
Budgeted operating income $90,000
If the Bidwell Company is subject to an effective income tax rate of 40%, the number of units Bidwell must sell to earn an after-tax profit of $90,000 is
A. 102,858 units.
B. 100,000 units.
C. 145,000 units.
D. 120,000 units.
D. 120,000 units.
Bidwell’s total contribution margin is $300,000 ($1,000,000 sales – $700,000 total variable costs), so its unit contribution margin (UCM) is $3 ($300,000 ÷ 100,000 units). Treating desired after-tax profit as an additional fixed cost allows the target unit sales to be calculated as follows:
Target unit sales = {Fixed costs + [Target net income ÷ (1.0 – .40)]} ÷ UCM
= [$210,000 + ($90,000 ÷ .60)] ÷ $3
= ($210,000 + $150,000) ÷ $3
= 120,000
Harper and her band want to put on a concert. They have looked at two venues, a small one and a large one, and have compiled the following information:
Capacity of venue
Small 400
Large 1,200
Fixed costs
Small $2,000
Large $5,000
The variable cost per customer for both venues is $2. The band will charge $10 per customer for the small venue or $14 for the large venue.
Harper owes the local music store $1,000 for equipment. If she intends to use the profit from the concert to pay back the debt, how many tickets must she sell?
A. 300 small or 500 large.
B. 375 small or 500 large.
C. 375 small or 429 large.
D. 300 small or 429 large.
B. 375 small or 500 large.
Harper’s unit contribution margins (UCM) for the small and large venues are $8 ($10 - $2) and $12 ($14 - $2), respectively. Treating profit as an additional fixed cost allows the calculation of target unit sales as follows:
Small
Target unit sales = (Fixed costs + Target operating income) ÷ UCM
= ($2,000 + $1,000) ÷ $8 = 375
Large
Target unit sales = (Fixed costs + Target operating income) ÷ UCM
= ($5,000 + $1,000) ÷ $12 = 500
Oradell Company sells its single product at a price of $60 per unit and incurs the following variable costs per unit of product:
Direct material $16
Direct labor 12
Manufacturing overhead 7
= variable manufacturing costs $35
Selling expenses 5
= Total variable costs $40
Oradell’s annual fixed costs are $880,000, and Oradell is subject to a 30% income tax rate.
The annual sales revenue required by Oradell Company in order to achieve after-tax net income of $224,000 for the year is
A. $3,110,400
B. $3,312,000
C. $3,600,000
D. $1,656,000
C. $3,600,000
Oradell’s contribution margin ratio (CMR) is 33.3% [($60 selling price – $40 unit variable cost) ÷ $60 selling price]. Treating desired after-tax profit as an additional fixed cost allows the target unit sales to be calculated as follows:
Target dollar sales
= {Fixed costs + [Target net income ÷ (1.0 – .30)]} ÷ CMR
= [$880,000 + ($224,000 ÷ .70)] ÷ .33333333
= ($880,000 + $320,000) ÷ .33333333
= $3,600,000
At a selling price of $60 each, the total revenue is $3,600,000 (60,000 units × $60).
An entity has decided to focus strictly on producing and selling one type of teddy bear. For the upcoming year, the entity hopes to make a 25% profit on sales. Fixed costs are set at $51,000, and variable costs are $9.50 per unit. If teddy bears are sold at $15 each, how many bears must be sold to meet the profit goal?
A. 9,273
B. 5,514
C. 29,143
D. 13,600
C. 29,143
Sales equal the sum of fixed costs, variable costs, and profit. The profit is the selling price per unit multiplied by the percentage profit desired. If x equals unit sales,
$15x = $51,000 + $9.50x + .25($15x)
$15x = $51,000 + $13.25x
$1.75x = $51,000
x = 29,143 units
A company attempts to achieve an annual after-tax operating profit of $2,400,000 by selling a good for $3,000 per unit. Production of the good involves fixed costs of $15,000,000 and variable cost per unit of $2,000. Assuming an average income tax rate of 40%, the volume (in units) required to produce the target amount of profit would be
A. 21,000
B. 19,000
C. 15,000
D. 16,440
B. 19,000
The formula for target unit volume is as follows:
[(Fixed Costs + Target Operating Income)] ÷ Unit Contribution Margin
In this question, the unit contribution margin is $1,000 ($3,000 – $2,000). The fixed costs of $15,000,000 are given. Target operating income has to be on a pretax basis. In this question, an after-tax figure is given and must be adjusted accordingly:
$2,400,000 = X (100% – 40%)
X = $2,400,000 ÷ 60%
X = $4,000,000
Now plug the numbers into the formula and solve for target unit volume:
Target unit volume = ($15,000,000 + $4,000,000) ÷ $1,000
Target unit volume = 19,000 units
Donnelly Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income last year was $5,040. Donnelly’s expectations for the coming year include the following:
- The sales price of the T-shirts will be $9.
- Variable cost to manufacture will increase by one-third.
- Fixed costs will increase by 10%.
- The income tax rate of 40% will be unchanged.
Sales for the coming year are expected to exceed last year’s by 1,000 units. If this occurs, Donnelly’s sales volume in the coming year will be
A. 23,400 units.
B. 21,960 units.
C. 22,600 units.
D. 21,000 units.
C. 22,600 units.
Given that last year’s after-tax profit was $5,040, pretax net income must have been $8,400 [$5,040 ÷ (1.0 – 0.4 tax rate)]. Because fixed cost has been fully recovered at the BEP, all of the UCM beyond that sales level is included in pretax net income. The UCM was $5.25, so the units sold in excess of the 20,000-unit BEP equaled 1,600 ($8,400 ÷ $5.25). If 21,600 total units were sold last year, an increase of 1,000 units results in sales of 22,600 units.
A firm manufactures only one product and is preparing its budget for next year based on the following information:
Selling price per unit $ 100
Variable costs per unit 75
Fixed costs 250,000
Effective tax rate 35%
If the firm wants to achieve a net income of $1.3 million next year, its sales must be
A. 62,000 units.
B. 70,200 units.
C. 90,000 units.
D. 80,000 units.
C. 90,000 units.
Unit contribution margin is $25 ($100 selling price – $75 unit variable cost). Treating desired after-tax profit as an additional fixed cost allows the target unit sales to be calculated as follows:
Target unit sales = {Fixed costs + [Target net income ÷ (1.0 – .35)]} ÷ UCM
= [$250,000 + ($1,300,000 ÷ .65)] ÷ $25
= ($250,000 + $2,000,000) ÷ $25
= 90,000
Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device:
Direct labor $180
Direct materials 240
Factory overhead 105
Variable production costs $525
Marketing costs 75
Total variable costs $600
Madengrad’s income tax rate is 40%, and annual fixed costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last 5 years.
For Madengrad Company to achieve an after-tax net income of $540,000, annual sales revenue must be
A. $2,700,000
B. $22,500,000
C. $21,420,000
D. $23,850,000
B. $22,500,000
Madengrad’s contribution margin ratio (CMR) is 33.3% [($900 selling price – $600 variable costs) ÷ $900 selling price]. The dollar sales required to achieve a given level of after-tax income can be calculated as follows:
Target dollar sales = {Fixed costs + [Target net income ÷ (1.0 – .40)]} ÷ CMR
= [$6,600,000 + ($540,000 ÷ .60)] ÷ .33333333
= ($6,600,000 + $900,000) ÷ .33333333
= $22,500,000
