Question

In: Accounting

Casper Karts manufactures a three-wheeled shopping cart that sells for $60. Variable cost per shopping cart...

Casper Karts manufactures a three-wheeled shopping cart that sells for $60. Variable cost per shopping cart is $45. Annual fixed cost is $975,000. Casper Kart sold 80,000 shopping carts in this year.

1. Please use the format of a contribution margin income statement to calculate the contribution margin (in dollars), unit contribution, and contribution margin ratio for Casper Karts. You can refer to Example 1 in the textbook.

2. What will be the break-even point in units and in dollars if we assume that Casper Karts sells this product (the three-wheeled shopping cart) only?

3. How many units must the company sell to earn a pre-tax income of $900,000?

4. If the company’s tax rate is 40 percent, how many units must be sold to earn an after-tax profit of $750,000?

5. What is the company’s margin of safety based on the sales of 80,000 shopping carts? 6. Assume that there is no change in fixed costs. What will be the expected net income if this company has the sales revenue of $5,700,000?

Expert Solution

Ans. 1 Contribution margin Statement

Sales (80000X60) = 4800000

Less: Variable cost (45X80000) = 3600000

Contribution margin = 1200000

Contribution margin per unit (60-45) = $15

Contribuiton margin ratio = 15/60X100 = 25%

2. Calculation of break Even point = Fixed cost /contribution margin ratio

= 975000/.25 = 3900000

Break even point in Units = 3900000/60 = 65000 units

or 975000/15 = 65000 units

3. Desired pre tax income = 900000

calculation of no of units to be sold for desired income = (Fixed cost+desired income ) /Contribution per unit

= (975000+900000)/15 = 125000 units

4. Desired after tax profit = 750000

Tax rate = 40%

Desired profit pre tax = 750000/.60 = 1250000

Desired sales units required for after tax profit amt 750000 = (fixed cost+pre tax profit)/contribution margin p.u

= (975000+1250000)/15 = 148334 units

5. Margin of safety = total sales-break even sales

Sales value of 80000 units (80000X60) = 4800000

Break even sales (65000X60) = 3900000

Margin of Safety = 900000

Calculation of expected net income if company sales is $5700000

Contribution margin = 25%

Total contribution (5700000X.25) = 1425000

Less: Fixed cost = 975000

Net income = 450000

ekkarill92 answered 1 year ago

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