In: Accounting
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.
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