Question

Riyadh Electricity Company manufactures chandeliers . Following is information for next year’s operations, based on an estimated volume of 20,000 units: 4 marks

Expected revenues                                     $1,000,000

Unit costs:

Direct materials                                          $ 6.25

Direct labor                                                  15.75

Variable overhead                                          5.50

Fixed manufacturing overhead                       2.50

Total                                                     $30.00

Other fixed costs:

Administration, marketing, etc.              $225,000

Income tax rate                                                     30%

a.   What is the breakeven point for next year?

b.   What is next year’s projected after-tax income?

c.   Suppose the managers set a target after-tax income of $100,000. Estimate the number of units that must be sold.

Answer 1

a	BEP for next year	10000 units
b	After tax income next year	$122,500
c	Estimated number of units	18571 units ($417847/22.5 per unit)
	See workings below for calculations
		A	B		C
		Per unit	Value		18571	units
1	Expected sales revenue	$50	$1,000,000	1000000/2000units	$928,550
2	Expected units	20,000.00
3	Direct materials	$6.25	$125,000	$6.25 X 2000units
4	Direct labor	$15.75	$315,000	$15.75 X 2000units
5	Variable overhead	$5.50	$110,000	$5.5 X 2000units
6	total variable cost (6.25+15.75+5.5)	$27.50	$550,000	27.5 X 2000units
7	Fixed manufacturing overhead	$2.50	$50,000	$2.5 X 2000units
8
9	Administration, marketing, etc.	$11.25	$225,000	225000/20000 units
10	Total fixed cost (2.5+11.25)	$13.75	$275,000
11	Total cost (variable + fixes	$41.25	$825,000	($550000+ $275000
12	Contribution (Sales less Variable cost(1-6)	$22.50	$450,000	$1000000-$550000	$417,847.50	141857+275000
13	Profit before tax (Sales less total cost	$8.75	$175,000	($1000000-$825000)	$142,847.00	100000/70 X 100
14	Tax @ 30% $175000 X 30/100		$52,500		$42,847.00
15	Profit after tax( $175000- $52500)		$122,500		$100,000.00
16	break even units = Fixed cost value / Contribution per unit2 ($275000/27.5 per unit)	10000 units
			Target profit after tax $ 100000 means we have to go back calculations post tax $100000 equals to 70% then $100000/70 X100 = $142857
			No of units at target profit $100000 post tax
			Target profits units= Fixed cost + Disered profit Pretax /Contribution per unit	18571 units ($417847/22.5 per unit)	(.$141857 +275000)/$22.5 per unit