Question

Part A. Pigwidgeon Company charges a selling price of $30 per unit for its single product,...

Part A.

Pigwidgeon Company charges a selling price of $30 per unit for its single product, incurs variable costs of $14 per unit, and total fixed costs of $280,000.

What unit sales volume is necessary to earn a net income before tax of $40,000?

Part B.

Pigwidgeon Company charges a selling price of $30 per unit for its single product, incurs variable costs of $14 per unit, and total fixed costs of $280,000.

What sales volume is necessary to earn a net income after tax of $42,000, assuming a tax rate of 25%?

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Homework Answers

Answer #1

Contribution margin=Sales-Variable cost

=(30-14)=$16 per unit

a.Target Contribution margin=Fixed cost+Target profits

=(280,000+40,000)=$320000

Hence units to be sold=Target Contribution margin/Contribution margin per unit

=320000/16

=20,000 units

b.Target before tax income=Net income after-tax/(1-tax rate)

=42000/(1-0.25)=$56000

Target Contribution margin=Fixed cost+Target profits before tax

=(280,000+56000)=$336000

Hence units to be sold=Target Contribution margin/Contribution margin per unit

=336000/16

=21000 units

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