Question

Rose Corporation manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device:

Direct labor                                         $180

Direct materials                                  240

Factory overhead                                105

Total variable production costs          525

Marketing costs                                      75

Total variable costs                            $600

Rose’s income tax rate is 40%, and annual fixed costs are $4,000,000.

Required:

a)     If Rose Corporation achieves a sales and production volume of 8,000 units, determine the net income (loss).

b)     Determine the annual sales revenue to achieve an after tax net income of $540,000.

Answer 1

Solution:
a.	Net income (loss)	($1,600,000)
Working Notes:
	At 8000 units of volume
	Sales value	$7,200,000
	[selling price per unit x units sold ]
	[$900 x 8000 ]
	Less: Total Variable cost	$4,800,000
	[Total variable cost per unit x unit sold ]
	[$600 x 8,000 ]
	Contribution margin	$2,400,000
	Less: Fixed cost	$4,000,000
	Net loss	($1,600,000)
	As there is loss tax will not be payable so not charged
b.	Annual sales revenue	14,700,000
Working Notes:
	After tax net income = $540,000
	therefore before tax net income = After tax net income /(1-tax rate )
		= $540,000/(1-40%)
		=$540,000/60%
		=$900,000
	Target contribution margin = Total fixed cost + Target before tax net income
		=$4,000,000 + $900,000
		=$4,900,0000
	Contribution margin per unit = Selling price per unit - variable cost per unit
		=$900 - $600
		=$300
	Target units sales = Target contribution margin / contribution margin per unit
		=$4,900,000/$300
		=16,333.3333333 units
	Annual sales revenue to achieve $540,000 = Target units sales x selling price per unit
		=16,333.333333 x $900
		=14,699,999.9997
		=$14,700,000
Please feel free to ask if anything about above solution in comment section of the question.