Question

Tablework Inc. produces tables which it sells for $200 each.  The company's only variable costs are materials...

Tablework Inc. produces tables which it sells for $200 each.  The company's only variable costs are materials and labor and its only fixed cost is factory rent.  For the upcoming year, Tablework has signed a contract with its suppliers and materials costs will be $26 per leg. The company's combined state and federal tax rate is 50%.

Note:  It takes one labor hour to produce each table.

                           Rate/hour

Labor cost:          $100          

                           Total Amount

Factory Rent       $220,000            

How many tables will the company need to sell next year to earn a target operating income of $50,000, after taxes?

Business   Accounting   
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Answer #1

1. Operating Income before taxes = Operating Income after taxes / (1 - Tax Rate)

Operating Income before taxes = $50000 / (1 - 50%)

Operating Income before taxes = $100000

2. Contribution margin required = Operating Income before taxes + Factory rent = $100000 + 220000 = $320000

3. Contribution margin per unit = Sales price - Material - Direct Labor

Contribution margin per unit = $200 - $26 * 4 - $100

Contribution margin per unit = -$4

Company cannot reach the contribution margin required as the CM per unit is negative

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