In: Finance
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
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 |