In: Accounting
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)- 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