Question

The following is Allison Corporation's contribution format income statement for last month: Sales $700,000 Variable expenses 300,000 Contribution margin 400,000 Fixed expenses 300,000 Net operating income $100,000 The company has no beginning or ending inventories. The company produced and sold 10,000 units last month.

(a) How many units would the company have to break even?

(b) How many units would the company have to sell to attain target profits of $150,000 after tax when tax rate is 40%?

Answer 1

a.units to break even = fixed costs / (contribution per unit)

here,

fixed costs = 300,000

contribution per unit = contribution margin / number of units

=>400,000 / 10,000 units

=>$40.

units to break even = $300,000 / 40

=>7,500 units.

b.desired after tax profit = 150,000.

so before tax profit will be =after tax profit / (1- tax rate)

=>$150,000 / (1-0.40)

=>$250,000.

units required = (fixed costs + before tax required profit) / contribution per unit

=>(300,000+250,000) /$40

=>$13,750 units