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Simple Metal Works, Inc. will manufacture and sell 250,000 units next year. Fixed costs will total...

Simple Metal Works, Inc. will manufacture and sell 250,000 units next year. Fixed costs will total $330,000, and variable costs will be 60 percent of sales.

a. The firm wants to achieve a level of earnings before interest and taxes of $250,000. What selling price per unit is necessary to achieve this result?

b. Set up an analytical income statement to verify your solution to part

Expert Solution

Number of Units the company wil sell next year = 250000 units

Fixed Costs = $330000

Variable Costs = 60% of Sales

a. The firm wants to achieve an EBIT of $250000

So, EBIT = Contribution - Fixed Costs

$2,50,000 = Contribution - $3,30,000

So, Contribution = $3,30,000 + $2,50,000
Contribution = $5,80,000

Now, Let the selling price be $ P

So, Sale Value = Number of units to be sold next year * Selling Price

Sales Value = 2,50,000 * $P

Sale Value = $250000P

If Sale Value = $250000P, Variable Costs = 0.6 * Sales Value

So, Variable Costs = 0.6 * $250000P

Variable Costs = $150000P

We know, Contribution = Sales Value - Variable Costs

So, $5,80,000 = $2,50,000P - $1,50,000P

So, $5,80,000 = $1,00,000P

Therefore, P = $5,80,000/$1,00,000

Therefore, P = $5.8

Therefore Selling Price per unit is $5.8

b. The following is the analytical income Statement to verify the solution mentioned above:

Particulars	Total ($)
Sales Value (2,50,000 * $5.8)	14,50,000
Less: Variable Cost (Sales Value * 0.6)	8,70,000
Contribution (Sales Value - Variable Costs)	5,80,000
Less. Fixed Costs	3,30,000
Earnings before Interest and Tax (Contribution - Fixed Costs)	2,50,000

jeff jeffy answered 1 year ago

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