Question

Shine Bright is a start up company that sells a single product: sustainable toothpaste. Shine Brights's fixed costs are $18,000 and their cost per unit is $2. In order to provide a return to their investors, management would like to generate an after-tax operating income of $6,000. Management believes that their toothpaste can sell for $3.50 per unit. If Shine Bright is taxed at 20%, how many units does management need to sell to achieve their target after-tax operating income?

16,000

17,000

12,000

12,750

Answer 1

Selling price per unit = $3.50

Variable cost per unit = $2

Contribution margin per unit = Selling price per unit – Variable cost per unit

= 3.50 - 2

= $1.50

After-tax operating income = $6,000

Tax rate = 20%

Before-tax operating income = After-tax operating income/(1 - tax rate)

= 6,000/(1 - 0.2)

= 6,000/0.8

= $7,500

Units to be sold to get a target profit = (Fixed cost + Target profit)/Contribution margin per unit

= (18,000 + 7,500)/1.50

= 25,500/1.50

= 17,000

Management needs to sell 17,000 units to achieve their target after-tax operating income.

Second option is correct