Question

Hammerhead Charters runs fishing trips out of the local port. Hammerhead charges $80 per trip for a half-day trip. Variable costs for Hammerhead total $35 per trip and the fixed costs are $10,350 per month. Hammerhead is subject to an income tax rate of 20 percent.

Required:

a. How many trips must Hammerhead sell to break even?

b. How many trips must Hammerhead sell to earn a monthly operating profit of $10,800 after taxes?

Answer 1

Answer for a)

Fixed cost =10350

Contribution per unit = Selling price per unit – variable cost per unit =80-35 =45

Breakeven point = Fixed cost / Contribution per unit

Breakeven point = 10350/45 = 230 trips

Answer for b)

Monthly profit required after tax = 10800

Profit before tax required = Monthly profit required after tax/ [1-tax rate]

Profit before tax required = 10800/[1-0.20] = 13500

Trips required = Fixed cost + target profit / Contribution per unit

Trips required = 10350+13500/45 = 530 trips