Cost Schedule: Variable costs per widget: D.Labor $12.00 D. Material 6.00 Variab
ID: 2510031 • Letter: C
Question
Cost Schedule:
Variable costs per widget:
D.Labor $12.00
D. Material 6.00
Variable Overhead 3.00
Total Variable Cost: $21.00
Fixed Cost:
Manufacturing $50,000
Selling 60,000
Administrative 90,000
Total Fixed Costs: $200,000
Selling price per pipe: $50.00
Expected sales this year (year 1) (40,000 units) $2,000,000
Tax Rate: 40%
The president has set the sales target for year 2 at the level of $2,200,000 (or 44,000 widgets).
Required:
a) What is the projected after-tax operating profit for year 1?
b) What is the break-even point in units for year 1?
c) The president believes that an additional expense of $40,000 for advertising in year 2, with all other costs remaining constant, will be necessary to attain the sales target. What will be the after-tax net income for year 2 if the additional $40,000 is spent?
d) What will be the break-even point in dollar sales for year 2 if the additional $40,000 is spent for advertising?
Explanation / Answer
a)
b)BEP = Fixed cost /contributio per unit
= 200000/(50-21)
= 200000/29
= 6896.55 [rounded to 6897 units]
c)
d)Cpntribution margin ratio =contribution /sales
= 29/50
= .58
BEP = 240000/.58
= $ 413,793
sales 2,000,000 less:Variable cost [40000*21] (840,000) contribution margin 1160000 less:fixed cost (200000) Income before tax 960000 less:Income tax expense [960000*.40] (384000) Net Income 576000