Question

A company sells only two products, Product A and Product B, and has the following cost information:

Selling price per unit – Product A                  $4

Selling price per unit – Product B                  $5

Variable cost per unit – Product A                 $2

Variable cost per unit – Product B                 $3

Total fixed costs                                                $840

The company sells two units of Product A for each unit it sells of Product B. The company faces an income tax rate of 30%.

A) What is the breakeven point in units for each product assuming the sales mix is 2 units of Product A for each unit of Product B?

B) What is the breakeven point if the company's income tax rate is reduced to 25%, assuming the sales mix is 2 units of Product A for each unit of Product B?

C) How many units of each product would be sold if the company desired an after-tax net income of $525, facing an income tax rate of 30%?

Answer 1

A company
Answer A	Product A	Product B	Total	Note
Price per unit	4.00	5.00
Less: Variable cost per unit	2.00	3.00
Contribution per unit	2.00	2.00		A
Sales Mix	2.00	1.00	3.00	B
Total contribution per unit	4.00	2.00	6.00	C=A*B
Weighted average contribution per unit			2.00	D=C/B
Fixed costs			840.00	E
Total Break even units			420.00	F=E/O
Break even units- Product wise	280.00	140.00	420.00	G=F/B*B

Answer B

At Break even point there is no loss or gain so tax liability will no arise. So even if tax rate is reduced to 25% the breakeven point will be same as answer A.

Answer C	Product A	Product B	Total
Target after-tax net income			525.00	H
Tax rate			30%	I
Retention rate			70%	J=1-I
Target profit before tax			750.00	K=H/J
Add: Total Fixed costs			840.00	See E
Desired Contribution			1,590.00	L=E+K
Weighted average contribution per unit			2.00	See D
Target sales			795.00	M=L/D
Sales Mix	2.00	1.00	3.00	See B
Sales units- Product wise	530.00	265.00	795.00	N=M/B*B