Question

Heady Company sells headbands to retailers for $5. The variable cost of goods sold per headband is $1, with a selling commission of 10 percent of sales. Fixed manufacturing costs total $25,000 per month, while fixed selling and administrative costs total $10,500. The income tax rate for Heady Company is 30 percent.

Required:

a. What is the break-even point in headbands?

b. What are target sales in headbands to generate a before-tax income of $3,000?

c. What are target sales in headbands to generate an after-tax income of $3,080?

Answer 1

Answer:
Selling Price per unit = $5

Selling Commission per unit = $5 * 10% = $0.50

Total Variable cost per unit = $1 + $0.50
Total Variable cost per unit = $1.50

Contribution Margin per unit = Selling Price per unit - Variable cost per unit
Contribution Margin per unit = $5 - $1.50
Contribution Margin per unit = $3.50

Total Fixed Cost = $25,000 + $10,500
Total Fixed Cost = $35,500

Part a.
Break Even Point (in Units) = Fixed Cost / Contribution Margin per unit
Break Even Point = $35,500 / $3.50
Break Even Point = 10,143 Headphones

Part b.
Targeted Sales (in Units) = (Fixed Cost + Before Tax Income) / Contribution Margin per unit
Targeted Sales = ($35,500 + $3,000) / $3.50
Targeted Sales = $38,500 / $3.50
Targeted Sales = 11,000 Headphones

Part c.
After Tax Income = $3,080
Tax Rate = 30%
Before Tax Income = $3,080 / (1 – 0.30)
Before Tax Income = $4,400

Targeted Sales (in Units) = (Fixed Cost + Before Tax Income) / Contribution Margin per unit
Targeted Sales = ($35,500 + $4,400) / $3.50
Targeted Sales = $39,900 / $3.50
Targeted Sales = 11,400 Headphones