Question

Riyadh Electricity Company manufactures chandeliers . Following is information for next year’s operations, based on an estimated volume of 20,000 units: 4 marks

Expected revenues                                    $1,000,000

Unit costs:

Direct materials                                         $ 6.25

Direct labor                                                  15.75

Variable overhead                                          5.50

Fixed manufacturing overhead                      2.50

Total                                                     $30.00

Other fixed costs:

Administration, marketing, etc.             $225,000

Income tax rate                                                    30%

a.   What is the breakeven point for next year?

b.   What is next year’s projected after-tax income?

c.   Suppose the managers set a target after-tax income of $100,000. Estimate the number of units that must be sold.

Answer 1

Solution a:

Total fixed costs = (20000*$2.50) + $225,000 = $275,000

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

= ($1,000,000/20000) - ($6.25 + $15.75 + $5.50)

= $22.50 per unit

Break even point (In units) = Fixed costs /contribution margin per unit = $275,000 / $22.50 = 12222 units

Solution b:

Projected after tax income for next year
Particulars	Amount
Sales	$1,000,000.00
Variable costs (20000*$27.50)	$550,000.00
Contribution margin	$450,000.00
Fixed costs	$275,000.00
Income before taxes	$175,000.00
Income tax expense (30%)	$52,500.00
Net Income	$122,500.00

Solution c:

Target after tax income = $100,000

Target before tax income = $100,000 / (1-0.30) = $142,857

Nos of units to be sold to earn target income = (Fixed cost + Target before tax income) / Contribution margin per unit

= ($275,000 + $142,857) / $22.50 = 18571 units