Question

I don't know how to solve the problem

Selling Price Required to Yield a Targeted Net Income Seahawk Company is planning to sell 200,000 units of product B. The fixed costs are $400,000 and the variable costs are 60% of the selling price. The Company wishes to realize net income before taxes of $90,000. The tax rate is 40%.

1. Calculate the sales price required to realize the target before-tax net income.
2. What sales price would be required to realize net income after taxes of $90,000

Answer 1

Answer 1.

Given, Net Income before tax = $90000. Contribution = Net Income before tax + Fixed cost = $90000+$400000 = $490000. Given Variable cost = 60 % of sales hence contribution will be 40% of sales Therefore slaes = Contribution/40%. = $490000/40% =$1225000

Hence sales price required to reliaze target net income before tax = Total sales/Total units. = $1225000/200000 = $6.125/unit.

Answer 2.

Net income after tax = $90000. Net income before tax = Net income after tax/(1-tax rate) = $90000/60% = $150000. Using the formulas mentioned in 1. Contribution = $150000 + $400000 = $550000. Sales = $550000/40% =$1375000. Sales price per unit = 1375000/200000 = $6.875/unit