Question

Selling price per unit			$               120
Current annual sales			$        240,000
Annual fixed costs
	Factory rent		$          43,400
	Depreciation expense - equipment		$          12,000
	Utilities		$          22,000
	Insurance		$            8,400
				$     85,800
Variable costs
	Direct materials		$                 36	per unit
	Direct labour		$                 48	per unit
Income tax rate			20%

If Bridgeport would like to earn a profit after tax that is 8% of sales, what should the sales be?

How many units does Bridgeport need to increase from the current sales level?

Answer 1

1) Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. Before-tax profit = After-tax profit / (1 - Tax rate) where, After-tax profit Tax rate So, Before-tax profit 8% 20% 10% [8%/(1-20%)] Workings: Unit Selling price Less: Direct Material cost Less: Unit Direct Labor cost Unit Contribution margin $120 $36 $48 $36 Before-tax profit = Sales - Variable Costs - Fixed Costs. Let the desired sales dollars be 'Z'. Then, Contribution margin ratio 30% ($36 / $120] Before-tax profit = (Z x Contribution margin ratio) - Fixed costs Z x 10% = Z x 30% - $85800 (Z x 30%) - (Z x 10%) = $85800 Zx 20% = $85800 Z = $85800 / 20% Z = $429,000

If Bridgeport would like to earn a profit after tax that is 8% of sales, its sales should be $429,000 2) If Bridgeport would like to earn a profit after tax that is 8% of sales, its sales should be Bridgeport's current sales units Number of units Bridgeport needs to increase from the current sales level 3,575 2,000 1,575 ($429000 / $120; Ref: calculated in Part-1] [$240000 / $120] [3575 minus 2000]