Question

Cancun Inc. expects to earn $150,000 next year after taxes on sales of $2,200,000. Cancun

manufactures only one size of garbage can. Cancun sells the products for $8 apiece and

they have a variable cost of $2.40 apiece. The company's tax rate is currently 34%.

1. Distinguish among fixed costs, variable costs and semivariable costs.

2. What are the firm's expected fixed costs for next year?

3. What is the break-even point in units and in sales dollars?

Answer 1

Solution 1

Fixed cost: These costs do not change with the number of units produced. These costs remain the same at every level of production like factory rent.

Variable cost: These costs change with the number of units produced like direct material.

Semi variable cost: These costs remains fixed at a certain level of production and then increase after that level of production. like the electricity charge, or factory can house only 1000 units however the production is 10,000 units so the factory rent remains fixed till 1000 units and then increases.

Solution-2
		Total	Per unit	No of units= Total/Per unit
	Sale	$      2,200,000	$     8.00	275,000
	Variable cost	$         660,000	$     2.40	275,000
	Contribution=sale-variable cost	$      1,540,000	$     5.60
	Required profit after tax	$         150,000
	Tax rate	34%
	Profit before tax	Profit after tax/(1-tax)
	Profit before tax	150000/(1-34%)
	Profit before tax	$    227,272.73
	Fixed cost=	Contribution - profit before tax
	Fixed cost=	1540000-227272.73
	Fixed cost=	$ 1,312,727.27
Solution-3		Total
	Sale	$      2,200,000
	Variable cost	$         660,000
	Contribution=sale-variable cost	$      1,540,000
	Contribution margin ratio=	Contribution/Sale
	Contribution margin ratio=	1540000/2200000
	Contribution margin ratio=	70.00%
	BEP in dollars=	Fixed cost/Contribution margin
	BEP in dollars=	1312727.27/70%
	BEP in dollars=	$ 1,875,324.67
	BEP in unit=	Fixed cost/Contribution per unit
	BEP in unit=	1312727.27/5.60
	BEP in unit=	234,416