CVP: Before- and After-Tax Targeted Income Head-Gear Company produces helmets fo
ID: 2504600 • Letter: C
Question
CVP: Before- and After-Tax Targeted Income
Head-Gear Company produces helmets for bicycle racing. Currently, Head-Gear charges a price of $230 per helmet. Variable costs are $80.50 per helmet, and fixed costs are $1,255,800. The tax rate is 25 percent. Last year, 14,000 helmets were sold.
Required:
1. What is Head-Gear's net income for last year?
$
2. What is Head-Gear's break-even revenue? In your computations, round the contribution margin ratio to two decimal places.
$
3. Suppose Head-Gear wants to earn before-tax operating income of $900,000. How many units must be sold? Round to the nearest whole unit.
units
4. Suppose Head-Gear wants to earn after-tax net income of $650,000. How many units must be sold? Round to the nearest whole unit.
units
5. Suppose the income tax rate rises to 35 percent. How many units must be sold for Head-Gear to earn after-tax income of $650,000? Round to the nearest whole unit.
Explanation / Answer
Required:
1. Head-Gear's net income = (($230-$80.50)*14,000-1,255,800)*(1-25%)=$627,900
2. Head-Gear's break-even revenue = 1,255,800/(230-80.50)*230=$1932000.00
3.
x*(230-80.50) -1,255,800 = $900,000= 14420 units
4.
(x*(230-80.50) -1,255,800)*(1-25%) = 650,000
x= 14197 units
5.
(x*(230-80.50) -1,255,800)*(1-35%) = 650,000
x= 15089 units
units must be sold for Head-Gear = 15089 units