Question

In: Accounting

Tiger Woods Enterprises manufactures two products (information follows). Fixed costs are $250,000; the tax rate is...

Tiger Woods Enterprises manufactures two products (information follows). Fixed costs are $250,000; the tax rate is 35%.

PRODUCT                                 SALES MIX                    SALES PRICE/UNIT         VARIABLE COST/UNIT

Deceit Potion   2   $50   $25

Forgiveness Ointment               1   $40   $15

Calculate (A) the composite contribution margin per unit, (B) the break-even point in composite units, and (C) the amount of sales revenues in dollars if the company reports after-tax income of $550,000. Label your answers and round answers in units to the nearest unit.

Solutions

Expert Solution

Answer:

(A) Composite contribution margin per unit

Contribution Margin per unit = Sales price per unit - Variable cost per unit

Contribution Margin per unit for Deceit potion = $50 - $25 = $25

Contribution Margin per unit for Forgiveness Ointment = $40 - $15 = $25

Composite Contribution Margin per unit

=(Contribution Margin per unit for Deceit potion * Sales mix percentage) + (Contribution Margin per unit for forgiveness ointment * Sales mix percentage)

= ($25 * [2/3]) + ($25 * [1/3])

= $16.67 + $8.33

= $25

(B) Break-even Point

Break-even (Units) = Total Fixed cost / Composite Contribution Margin per unit

                                   = $250,000 / $25

                                    = 10,000 units

No. of Units of products at Break-even

= Break-even units * Sales mix ratio

Deceit potion = 10,000 units * 2/3 = 6,667 units

Forgiveness Ointment = 10,000 units * 1/3 = 3,334 units

Break-even (Dollar Sales)

= Product units at Break-even * Sales price

Deceit potion = 6,667 units * $50 = $333,350

Forgiveness Ointment = 3,334 units * $40 = $133,360

Break-even (Dollar Sales) = $333,350 + $133,360 = $466,710

(C) Sales revenue to get an after-tax net income of $550,000

Income tax rate is 35%

After tax we need $550,000 net income

Before tax = $550,000 * 100/65 = $846,154

So, we need to compute sales revenue that recovers both fixed cost and before tax net income

Let us calculate units to recover both fixed cost and before tax net income

= ($250,000 + $846,154) / $25

= $1,096,154 / $25

= 43,847 units

No. of Units of products at Desired sales level

= No. of units * Sales mix ratio

Deceit potion = 43,847 units * 2/3 = 29,232 units

Forgiveness Ointment = 43,847 units * 1/3 = 14,616 units

Desired Sales revenue

= Product units at Desired sales level * Sales price

Deceit potion = 29,232 units * $50 = $1,461,600

Forgiveness Ointment = 14,616 units * $40 = $584,640

Desired Sales revenue = $1,461,600 + $584,640 = $2,046,240


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