Question

Cost-Volume Profit Analysis
Hailstorm Company sells a single product for $22 per unit. Variable costs are $14 per unit and fixed costs are $65,000 at an operating level of 7,000 to 12,000 units.

a. What is Hailstorm Company's break-even point in units?

?units

b. How many units must be sold to earn $12,000 before income tax?

?r units

c. How many units must be sold to earn $13,000 after income tax, assuming a 35% tax rate?

? units

Answer 1

Solution a:

Selling price per unit = $22

Variable cost per unit = $14

Contribution margin per unit = $22 - $14 = $8

Fixed cost = $65,000

Breakeven point in units = Fixed cost / Contribution margin per unit = $65,000 / $8 = 8125 units

Solution b:

Target income = $12,000

Target contribution margin = $12,000 + $65,000 = $77,000

Nos of units to be sold to earn target income before taxes = Target contribution / Contribution margin per unit

= $77,000 / $8 = 9625 units

Solution c:

Target after tax income = $13,000

Tax rate = 35%

Target income before tax = $13,000 / 65% = $20,000

Target contribution margin = $65,000 + $20,000 = $85,000

Nos of units to be sold to earn target income = Target contribution / Contribution margin per unit

= $85,000 / $8 = 10625 units