Question

Reliable Supply Company sells only two products, Product A and Product B.

	Product A	Product B	Total
Selling price	$35	$58
Variable cost per unit	$27	$42
Total fixed costs			$395,000

Reliable Supply sells 4 units of Product A for each 3 units it sells of Product B. Reliable Supply has a tax rate of 20%.

Required:

a.   What is the breakeven point in units for each product, assuming the sales mix is 4 units of Product A for each 3 units of Product B?

b.   How many units of each product would be sold if Reliable Supply desired an after-tax net income of $380,000, using its tax rate of 20%?

Answer 1

>> Product - A : Contribution margin per unit = $ 35 - $ 27

>> Product - A : Contribution margin per unit = $ 8.

>> Product - B : Contribution margin per unit = $ 58 - $ 42

>> Product - AB: Contribution margin per unit = $ 16.

>> Overal contribution margin per unit =[ ( $ 8 * 4 ) + ( $ 16 * 3 ) ] / 7

>> Overal contribution margin per unit = $ 11.43.

>> Overal Break even units = Fixed cost / overal contribution margin

>> Overal Break even units = $ 395,000 / $ 11.43

>> Overal Break even units = 34,558.

>> Break even units of Product - A = 34,558 * ( 4 / 7 )

>> Break even units of Product - A = 19,747

>> Break even units of Product - B = 34,558 * ( 3 / 7 )

>> Break even units of Product - B = 14,811.

:: Calculating Units to be sold to gain after tax net income of $ 380,000

>> Desired profit = $ 380,000 * ( 100 / 80 )

> Desired profit = $ 475,000.

>> Target sales = ( $ 395,000 + $ 475000 ) / $ 11.43

>> Target sales = 76.116

>> Product - A units sold to get desired profit  = 76,116 * ( 4 / 7 )

>> Product - A units sold to get desired profit   = 43,495.

>> Product - B units sold to get desired profit  = 76,116 * ( 3 / 7 )

>> Product - B units sold to get desired profit   = 32,621