Question

CVP: Before- and After-Tax Targeted Income

Head-Gear Company produces helmets for bicycle racing. Currently, Head-Gear charges a price of $240 per helmet. Variable costs are $96.00 per helmet, and fixed costs are $1,152,000. The tax rate is 25 percent. Last year, 14,000 helmets were sold.

Required:

1. What is Head-Gear's net income for last year?
$

2. What is Head-Gear's break-even revenue? In your computations, round the contribution margin ratio to two decimal places.
$

3. Suppose Head-Gear wants to earn before-tax operating income of $936,000. How many units must be sold? Round to the nearest whole unit.
units

4. Suppose Head-Gear wants to earn after-tax net income of $658,800. How many units must be sold? In your computations, round dollar amounts to the nearest dollar. Round your final answer to the nearest whole unit.
units

5. Suppose the income tax rate rises to 35 percent. How many units must be sold for Head-Gear to earn after-tax income of $664,560? Round to the nearest whole unit.
units

Answer 1

1.

Contribution margin Income Statement

Sales	$3,360,000 (14,000*$240)
Variable costs	$1,344,000 (14,000$96)
Contribution margin	$2,016,000
Fixed costs	$1,152,000
Income before taxes	$864,000
Taxes @ 25%	$216,000
Net income	$648,000

2.

Contribution margin per unit = Selling price per unit - Varaible costs per unit

= $240 - $96

= $144

Contribution margin ratio = Contribution margin per unit / Selling price per unit

= $144 / $240

= 0.6

Break-even revenue = Fixed costs / Contribution margin ratio

= $1,152,000 / 0.6

= $1,920,000

3.

Units to be sold = (Fixed costs + Desired operating income) / Contribution margin per unit

= ($1,152,000 + $936,000) / $144

= 14,500 units

4.

Income before tax = $658,800 / (1 - 0.25)

= $878,400

Units to be sold = (Fixed costs + Desired operating income) / Contribution margin per unit

= ($1,152,000 + $878,400) / $144

= 14,100 units

5.

Income before tax = $664,560 / (1 - 0.35)

= $1,022,400

Units to be sold = (Fixed costs + Desired operating income) / Contribution margin per unit

= ($1,152,000 + $1,022,400) / $144

= 15,100 units