Question

A company sells headbands to retailers for $5.30. The variable cost of per headband is $2.50, with a selling commission of 11.25% of sales. Fixed costs total $37,980. The income tax rate is 30%. What are the target sales (in number of headbands) to generate an after-tax income of $3,260?

Answer 1

Answer:

Let the number of headbands sold be x (to generate an after-tax income of $3,260)

Sales	5.30x
Less: Variable Cost	2.50x
Contribution	2.80x
Less: Sales commission (5.30x * 11.25%)	0.5963x
	2.2037x
Less: Fixed Cost	37980
Profit before tax	2.2037x - 37980
Less: Tax Rate @ 30 %	0.6611x - 11394
Profit after tax	1.5426x -26586

Now, this profit after tax should be equal to $3,260

Therefore, 1.5426x - 26586 = 3260
i.e. 1.5426x = 29846
i.e. x = 19348 (rounded off to nearest figure)

Therefore, the company should make sales of at least 19348 headbands to generate an after-tax income of $3,260