Question

	Price per Unit			Variable Cost per Unit			Units Sold per Year
Basic	$	700		$	220		700
Retest		1,050			580		200
Vital		4,600			3,100		100
Variable costs include the labor costs of the medical technicians at the lab. Fixed costs of $490,000 per year include building and equipment costs and the costs of administration. A basic "unit" is a routine drug test administered. A retest is given if there is concern about the results of the first test, particularly if the test indicates that the athlete has taken drugs that are on the banned drug list. Retests are not done by the laboratory that performed the basic test. A "vital" test is the laboratory's code for a high-profile case. This might be a test of a famous athlete and/or a test that might be challenged in court. The laboratory does extra work and uses expensive expert technicians to ensure the accuracy of vital drug tests. Limitless Labs is subject to a 20 percent tax rate.

a. How much will Limitless Labs earn each year after taxes? b. Assuming the above sales mix is the same at the break-even point, at what sales revenue does Limitless Labs break even? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar.) c. At what sales revenue will the company earn $200,000 per year after taxes assuming the above sales mix? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar.) d-1. Limitless Labs is considering becoming more specialized in retests and vital cases. Assume the number of retests increased to 500 per year and the number of vital tests increased to 250 per year, while the number of basic tests dropped to 100 per year? With this change in product mix, the company would increase fixed costs to $520,000 per year. What would be the effect of this change in product mix on Limitless Labs's earnings after taxes per year? d-2. If the laboratory's managers seek to maximize the company's after-tax earnings, would this change be a good idea?

Answer 1

1.Income “LimitLess Lab” will earn when tax Rate is 20%:

Calculation of Contribution for Each Test:

Particulars	Basic	Retest	Vital
Sales Price per unit	700	1050	4600
Less: Variable Cost per unit	220	580	3100
Contribution	480	470	1500

Income Statement:

Particulars	Basic	Retest	Vital
Contribution	480	470	1500
Units Sold	700	200	100
Contribution Earned	336,000	94,000	150,000
Particulars			Amount ($)
Combined Contribution from all the 3 Tests			580,000
Less: Fixed Costs			(490,000)
Net Profit (Before Tax)			90,000
Less: Tax @ 20%			(18,000)
Net Income earned (After Tax)			72,000

2. To Breakeven

For the company to break even it should earn atleast revenue before tax of $ 490,000 to cover the Fixed Costs. If the Company wants to maintain the sales mix in the ratio of 7:2:1, then the Sales mix at Break even will be as follows:

Calculation of Revenue of $ 490,000 in ratio of 7:2:1

Particulars	Basic	Retest	Amount ($) / Vital
Combined Revenue			490,000
Ratio	7	2	1
Revenue	343,000	98,000	49,000
Contribution per Unit	480	470	1500
Units (a/b)	714.5833	208.51063	32.6666

Calculation of Sales Mix

Particulars	Basic	Retest	Vital
Revenue	343,000	98,000	49,000
Contribution per Unit	480	470	1500
Units (a/b)	714.5833	208.51063	32.6666

Therefore to break even the company shall make revenue of 490,000 in above units of sales

3. At What Sales Revenue Company will earn after tax sales of $200,000 in above sales mix:

Particulars			Amount ($)
Net Income earned (After Tax)			200,000
Add: Tax @ 20%			50,000
Net Profit (Before Tax)			250,000
Add: Fixed Costs			490,000
Combined Contribution from all the 3 Tests			740,000
Particulars	Basic	Retest	Vital
Sales Mix	7	2	1
Revenue in Sales Mix	518,000	148,000	74,000
Contribution Per Unit	480	470	1500
No. of Units	1079.1666	314.8936	49.3333

4. Effect of Changes

Calculation of Contribution for Each Test:

Particulars	Basic	Retest	Vital
Sales Price per unit	700	1050	4600
Less: Variable Cost per unit	220	580	3100
Contribution	480	470	1500

Income Statement:

Particulars	Basic	Retest	Vital
Contribution	480	470	1500
Units Sold	100	500	250
Contribution Earned	48,000	235,000	375,000
Particulars			Amount ($)
Combined Contribution from all the 3 Tests			658,000
Less: Fixed Costs			(520,000)
Net Profit (Before Tax)			138,000
Less: Tax @ 20%			(27,600)
Net Income earned (After Tax)			110,400

Due to the change in the Sales Mix and increase in Fixed Costs Net Profit (After Taxes) increases to $ 110,400.

5.If the Manager opines to change to this Revised Product Mix, it will be beneficial to company as the profit increased by $ 38,400 ($ 110,400 - $ 72,000).