Question

Adam Granger operates a kiosk in downtown Chicago, at which he sells one style of baseball hat. He buys the hats from a supplier for $39 and sells them for $45. Adam’s current breakeven point is 22,800 hats per year.

-Adam has decided to increase his sales price to $46 to offset the supplier’s price increase. He believes that the increase will result in a 5% reduction from last year’s sales volume. What is Adam’s expected net income, assuming a 30% tax rate?

Answer 1

Solution :- Calculation of Adam's expected net income :-

Current selling price per unit = $45

Variable cost per unit = $39

Therefore, Contribution per unit = $45 - $39 = $6 per unit

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

Break even point in units 22800 = Fixed costs / $6 per unit

Therefore, Fixed costs = 22800 * $6 =$ 136800

Expected net income :-

Particulars	Amount
Expected selling price per unit	$46
Expected Variable cost per unit	$39
Expected Contribution per unit	$7
Expected Sales volume (22800 *95% = 21660 hats) [W note 1]	21660 hats
Total contribution ( 21660 hats * $7 per unit)	$151620
less : Fixed costs	$ 136800
Net income before tax	$14820
Less : Tax 30%	$4446
Expected net income after tax	$10374

W note :-1 Assumption : Last year sales volume = current breakeven point = 22800 Hats. Therefore , Expected sales volume = 95% of 22800 = 21660 Hats (because there is reduction of 5% in expected sales volume).