Question

CVP: Before- and After-Tax Targeted Income

Head-Gear Company produces helmets for bicycle racing. Currently, Head-Gear charges a price of $230 per helmet. Variable costs are $92.00 per helmet, and fixed costs are $1,158,000. The tax rate is 25 percent. Last year, 14,000 helmets were sold.

Required:

1. What is Head-Gear's net income for last year?
$

2. What is Head-Gear's break-even revenue? In your computations, round the contribution margin ratio to two decimal places.
$

3. Suppose Head-Gear wants to earn before-tax operating income of $843,000. How many units must be sold? Round to the nearest whole unit.
units

4. Suppose Head-Gear wants to earn after-tax net income of $601,200. How many units must be sold? In your computations, round dollar amounts to the nearest dollar. Round your final answer to the nearest whole unit.
units

5. Suppose the income tax rate rises to 35 percent. How many units must be sold for Head-Gear to earn after-tax income of $601,770? Round to the nearest whole unit.
units

Answer 1

1)- Head-Gear's net income for last year is:-

=($230 per helmet-$92 per helmet)*14000 helmets-$1158000

=$774000

2)-Break even revenue = Fixed cost/Contribution margin ratio

=$1158000/60%=$1930000

Contribution margin ratio={($230 per helmet-$92 per helmet)/$230 per helmet}*100 =60%

3)-Unit to be sold =(Fixed cost +Target income before tax)/ Contribution margin per unit

($1158000+$843000)/$138

=14500 units

4)- Unit to be sold =(Fixed cost +Target income before tax)/ Contribution margin per unit

{$1158000+($601200/75%)/$138}

=14200 units

5)- Unit to be sold =(Fixed cost +Target income before tax)/ Contribution margin per unit

{$1158000+($601770/65%)/$138}

=15100 units