Question

Company decided to invest in a machine to make new tablets. The Price of the machine is $600,000 and its economic life is five years. The machine is depreciated by the straight-line method and has no salvage value. The machine will produce 20,000 tablets every year. The variable production cost per tablet is $15, while fixed costs are $900,000. The corporate tax rate for the company is 30 percent. What should the sales price per tablet be for the firm to have a zero-accounting profit?

Answer 1

Answer : Let Sales Price be x

Earning Before Tax = Sales - Variable Cost - Fixed Cost - Depreciation

= (20000 * x) - (20000 * 15) - 900,000 - (600000 / 5)

= 20000 x - 1,320,000

Earning After Tax = Earning Before Tax - (Earning Before Tax * 30%)

= 20000 x - 1,320,000 - [(20000 x - 1,320,000) * 30%]

= 20000x - 1320000 - 6000x + 396000

As to Make Accounting Profit 0 we take Earning After Tax as 0

0 = 20000x - 1320000 - 6000x + 396000

14000 x = 1320000 - 396000

14000 x = 924000

==> x = 66

Therefore Sales Price will be 66 per Tablet.