Question

Ng Corporation produces and sells only one product; its selling price is $100 and its variable cost is $60 per unit. The company’s monthly fixed expense is $35,000.

Required:

1. Using the equation method, determine the unit sales that are required to earn a target profit before tax of $4,000.

2. Using the formula method, determine for the dollar sales that are required to earn a target profit before tax of $5,000.

3. Using the formula method, calculate the number of units that need to be sold to earn an after-tax income of $6,000, assuming a tax rate of 25%.

Answer 1

Answer- 1)- Using the equation method, the unit sales that are required to earn a target profit before tax of $4,000 = 975 units.

Using equation method:-

px = vx + FC + Profit

Where,
p= price per unit,
x = number of units,
v= variable cost per unit

FC = Total fixed cost.

Y= Target profit

At break-even point the profit is zero therefore the CVP formula is simplified to:

px = vx + FC

Solving the above equation for x which equals No. of sales units:-

Sales units to earn target profit - x=FC+Y/p-v

= ($35000+$4000)/($100 per unit-$60 per unit)

= $39000/$40 per unit

= 975 units         

2)- Using the formula method, the dollar sales that are required to earn a target profit before tax of $5,000=$100000

Explanation- Dollar sales to earn target profit = (Fixed costs+ Target profit)/Contribution margin ratio

= ($35000+$5000)/40%

= $100000

Contribution margin ratio = ($40 per unit/$100 per unit)*100

= 40%

Contribution margin per unit = Selling price per unit- variable cost per unit

= $100 per unit-$60 per unit

= $40 per unit

3)- Using the formula method, the number of units that need to be sold to earn an after-tax income of $6,000=1075 units.

= Fixed costs+ Pre tax profit)/Contribution margin per unit

= ($35000+$8000)/$40 per unit

= $43000/$40 per unit

= 1075 units

Where- Pre tax profit = $6000/75%

= $8000