Question

A company has sales of $10,000, a variable cost ratio of 30%, and fixed operating costs of $2,000. There is a loan of $10,000 which pays 10% interest, and the company is in the 40% tax rate.

a. Show the company’s income statement using the information above.

b. What is the company’s dollar sales breakeven?

Answer 1

A)

Income statement

	$
Sales revenue	10,000
Less: Variable cost [10,000 X 30%]	3,000
Contribution margin	7,000
Less: Fixed operating cost	2,000
Operating income	5,000
Less: Interest expense [ 10,000 X 10%]	1,000
Net income before tax	4,000
Less: Tax [ 4,000 X 40 %]	1,600
Net income after tax	2,400

B) Break even sales ( Dollars) = Fixed cost / PV ratio .

Fixed cost = fixed operating cost + Interest expenses = $ 2,000 + $ 1,000 = $ 3,000

PV ratio = [ Contribution / sales revenue ] X 100%

PV ratio = [ $ 7,000 / $ 10,000 ] X 100 %

PV ratio = 70%

Break even sales (Dollars) = $ 3,000 / 70% = $ 3,000 X 100/70 = $ 4,286

Note : Income tax doesn't considered as fixed cost in break even analysis, because when there is no sales revenue then there is no income tax.