Question

A company has a unit contribution margin of $50, fixed costs of $15,000 and a target profit of $20,000 after-tax. If the tax rate is 20% the company must sell ________ units in order to earn the target profit.

Answer 1

Unit Contribution Margin = $50

Fixed cost = $15,000

Profit after-tax = $20,000

Tax rate = 20%

Profit before tax = $20,000 * 100 / (100 - 20)

Profit before tax = $25,000

Minimum number of units required to sell to earned desired profit before tax of $25,000 is

= (Fixed cost + Desired profit before tax) / Contribution Margin per unit

= ($15,000 + $25,000) / $50 per unit

= 800 units

Answer = 800 units

Check

Contribution Margin = 800 units * 50 = $40,000

Less: Fixed Cost = $15,000

Profit Before tax = $25,000

Less: Tax (20%) = $5,000

Profit After tax = $20,000