Question

Ibrahim Corporation manufactures product A. Following is information for next year’s operations, based on an estimated volume of 40,000 units:

Expected revenues                                    $2,000,000

Unit costs:

Direct materials                                              $ 7

Direct labor                                                       16

Variable overhead                                               6

Fixed manufacturing overhead                           3

Total                                                          $32

Other fixed costs:

Administration, marketing, etc.             $230,000

Income tax rate                                                    30%

a.   What is the breakeven point for next year?

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

c.   Chose a target after-tax income. Estimate the number of units that must be sold to reach this target.

Answer 1

Total Fixed costs = Fixed manufacturing overhead + Other fixed costs

= 3*40,000 + 230,000

= $350,000

Contribution Margin per Unit = Selling Price per Unit - Variable cost per unit

= 50-7-16-6 = $21

Hence, break even point = Fixed costs/Contribution Margin per unit

= 350,000/21

= 16,666.67 units

b.Projected After tax Income = (Sales - variable costs - fixed costs)(1-Tax rate)

= (21*40,000 - 350,000)(1-30%)

= $343,000

c.Let desired after tax income be = $122,500

Required income before tax = 122,500/(1-30%) = $175,000

Desired Unit Sales = (Target Income before tax + Fixed costs)/Unit contribution Margin

= (175,000+350,000)/21

= 25,000 units