Question

Effect of taxes on break-even and target volume Machine INC desires an after-tax income of $500,000. It has fixed costs of $2,500,000, a unit sales price of $300, and unit variable costs of $150; it is in the 40% tax bracket. Required: A. What amount of the pre-tax income is needed to earn an after-tax income B. What target volume sales revenue must be reached to earn the $500,000 C. Assuming that this is a single-product firm, how many units must be sold D. What target volume sales revenue would have been needed to achieve the of $500,000? after-tax income? to earn the after-tax income of $500,000? $500,000 of income had no income tax existed?

Answer 1

Contribution margin per unit = Selling price per unit – Variable cost per unit

= $300-$150

= $150

CM ratio = CM/Sales = 150/300

= 50%

A.After tax income = $500,000

Required Pre tax income = 500,000/(1-40%)

= $833,333.33

B.Pre tax income = $833,333.33

Add: Fixed costs = $2,500,000

Desired contribution margin = $3,333,333.33

Hence, target sales volume = 3,333,333.33/50% = $6,666,666.67

C. Number of units = Desired contribution margin/Contribution margin per unit

= 3,333,333.33/150 = 22,222.22 units

D.Desired Pre tax income = $500,000

Add: fixed costs = $2,500,000

Desired contribution margin = $3,000,000

Target Sales revenue = 3,000,000/50% = $6,000,000