Question

Use the information below to answer the following two questions:

Star Jewelry sells 500 units resulting in $75,000 of sales revenue, $28,000 of variable costs, and $18,000 of fixed costs. The company's effective tax rate is 25%.

1) Breakeven point in units is ________.

A) 28,723 units

B) 120 units

C) 187 units

D) 192 units 14)

2) The number of units that must be sold to achieve $40,000 of operating income is ________.

A) 590 units

B) 399 units

C) 723 units

D) 532 units

Answer 1

1) At break even point there will be no tax, as at break even point cost and revenue will be equal.

Therefore revenue - cost = 0 , So no tax.

Break even point in units = Fixed cost / Contribution per unit

Contribution per unit = selling price per unit - variable cost per unit

selling price per unit = sales / no. of units = $75,000 / 500 = $150 per unit

variable cost per unit = Variable cost / no. of units = $28,000 / 500 = $56 per unit

As Contribution per unit = selling price per unit - variable cost per unit

Contribution per unit = 150 - 56 = $ 94 per unit

Break even point in units = Fixed cost / Contribution per unit = $18000/94 = 192 Units

Therefore for Question 1 Answer is option D) 192 Units

2) To achieve $40,000 of operating income

This after tax , so net income required before tax = 40000 * 125/100 = $50,000

No. of units required = Fixed cost + income required / contribution per unit

contribution per unit is as calculated above.

No.of units required = (18000+50000)/94 = 723Units

Therefore for Question 2 Answer is option c) 723 Units