Question

In: Computer Science

STRATEGIC COST MANAGEMENT - BREAK-EVEN POINT AND CVP ANALYSIS

Cornwell Company is in business since 2010, makes swimwear for professional athletes. Analysis of the firm's record for the year reveals the following:

                Average swimsuit selling price                      $140

                Average swimsuit expenses:

                    Direct Material                                           $60

                    Direct labor                                                  25

                     Variable overhead                                        15

               Annual fixed cost:

                    Selling                                                       $20,500

                    Administrative                                            48,000

The company's tax rate is 40 percent. Daisy Rin, company president, has asked you to help her answer: How much revenue must be generated to realize $79,900 of after-tax earnings? How many swimsuits would this represent?

Solutions

Expert Solution

After-tax earnings

      Before-tax income = After-tax income/ 1-tax rate

                                    = $79,900/0.60

                                    = $133,166.67

      Target Sales Revenue = Fixed Cost +Target profit margin/Sales Price (per unit) - Variable cost (per unit)/Sales Price

                                        = $68,500 + $133,166.67/$140-$100/$40

                                        = $201,666.67/0.28571428571

                                           = $705,833.33

     Number of swimsuits = Target Sales Revenue/ Sales Price

                                       = $705,833.33/$140

                                       = 5,041.67 or 5,042 swimsuits

 


$705,833.33 revenue after-tax

5,041.67 or 5,042 swimsuits 

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