Question

Ahmed’s income statement is as follows:

Sales (10,000 units)	$40,000
Less variable costs	(24,000)
Contribution margin	$16,000
Less fixed costs	(12,000)
Operating income	$ 4,000

1. If Sales increase by $10,000, what is the new operating income?
2. Calculate the Break-even point in units for Herman.
3. Herman wants to earn operating income of $20,000. What amount of sales dollars will he need in to accomplish this goal?
4. Herman wants to earn net income (after taxes) of $35,000 and his tax rate is 30%. What amount of sales dollars will he need to accomplish this goal?

Answer 1

(A) Sales increase by $10,000, then new operating income

Sales price = 40,000/10,000 = $ 4.00

Sales units = 10,000 / 4 = 2,500 units

Variable Cost per unit = 24,000 / 10,000 = $ 2.4

Total units 12,500

Particular	Cost price ($)	Total cost ($)
Sales	4.0	50,000
Less- Variable cost	2.4	30,000
Contribution margin	1.6	20,000
Less - Fixed cost		12,000
Operating income		8,000

(B) Break-even point in units for Herman

= Fixed cost / Contribution margin per unit

= $ 12,000 / $ 1.6

= 7,500

(C) Sales to earn $ 20,000

Sales in units = ( Total fixed cost + Target income) / Contribution margin per unit

= ( 12,000 + 20,000 ) / 1.6

= 32,000 / 1.6

= 20,000 units

Sales in dollar = 20,000 * $ 4.00

= $ 80,000

(D) Amount of sales dollars to earn profit of $ 35,000

Profit before tax = 100 * 35,000 / 70

= $ 50,000

Sales in units = ( Total fixed cost + Target income) / Contribution margin per unit

= ( 12,000 + 50,000 ) / 1.6

= 62,000 / 1.6

= 38,750 units

Sales in dollar = 38,750 * $ 4.00

= $ 155,000