Question

Liman Company has a single product whose selling price is $140 and whose variable expense is $60 per unit. The company’s fixed expense is $40,000. REQUIRED Using the equation method, solve for the units required to earn a target profit of $6,000 Selling price – Variable expenses – Fixed Expenses = Target profit 140U – 60U – 40,000 = 6,000 80U = 46,000 46,000 / 80 = 575 units (Fixed Costs + Target Income)/CM 46,000 / 80 Using the formula method, solve for the dollar sales that are required to earn a target profit of $8,000 If tax rate is 40%, how many units should be sold to earn a target after tax profit of $6,000? Selling price – Variable expenses – Fixed Expenses = Target profit / (1 – T) 140U – 60U – 40,000 = 6,000 / (1 - .40) 140U – 60U – 40,000 = 6,000/.60 80U – 40,000 = 10,000 80U = 50,000 50,000/80

Answer 1

Selling Price per unit = $140
Variable Cost per unit = $60
Fixed Expense = $40,000

Answer a.

Let Required Unit Sale be x

Target Profit = Sales Revenue - Variable Expense - Fixed Expense
Target Profit = Selling Price per unit * Unit Sale - Variable Cost per unit * Unit Sale - Fixed Expense
$6,000 = $140 * x - $60 * x - $40,000
$46,000 = $80 * x
x = 575 units

Required Unit Sale = 575 units

Answer b.

Contribution Margin Ratio = (Selling Price per unit - Variable Cost per unit) / Selling Price per unit
Contribution Margin Ratio = ($140 - $60) / $140
Contribution Margin Ratio = 4 / 7

Required Sale Dollar = (Fixed Expense + Target Profit) / Contribution Margin Ratio
Required Sale Dollar = ($40,000 + $8,000) / (4 / 7)
Required Sale Dollar = $84,000

Answer c.

After-tax Profit = Pre-tax Profit * (1 - tax)
$6,000 = Pre-tax Profit * (1 - 0.40)
Pre-tax Profit = $10,000

Let Required Unit Sale be x

Target Profit = Sales Revenue - Variable Expense - Fixed Expense
Target Profit = Selling Price per unit * Unit Sale - Variable Cost per unit * Unit Sale - Fixed Expense
$10,000 = $140 * x - $60 * x - $40,000
$50,000 = $80 * x
x = 625 units

Required Unit Sale = 625 units