Question

Part 2.  Gayle and Joy are concerned that the estimated fixed costs are too low. They believe that they’ll need additional equipment, increasing their fixed costs by $ 31,500. Also, there has been a change in the corporate tax rate. Find the new 2018 corporate tax rate and properly cite your source (Links to an external site.). Adjust your analysis to assume an increase of $31,500 in fixed costs and the new corporate income tax rate.

1. Prepare a schedule summarizing the effects of the change.
2. Discuss the impacts on break even units of adding additional fixed costs.
3. What would the impact on break even units be if the company increased advertising by $40,000

   By "prepare a schedule," I mean a table that summarizes the changes. Here is an example of one way to do that:

4. 

   -------Before -------- Change -----After------- 1,000,000 1,000,000 100,000 Per unit Sales $ 10.00 Cost of Goods Sold: Raw Material 3.00 Direct Labor 2.00 Factory - variable 1.50 Selling & Admin - variable 0.50 Contribution Margin Factory - fixed Selling & Admin - fixed Operating Income Income Tax Net Income 300,000 200,000 150,000 50,000 700,000 300,000 300,000 200,000 150,000 50,000 300,000 1,100,000 210,000 (1,010,000) XXXXXXXX + 1,000,000 100,000 110,000 210,000 90,000 XXXXXXXX XXXXXXXX 1. Breakeven units 210000/3 70,000 units 2. Target after-tax profit [Fixed Cost + (Target Income/(1-tax rate)] / CM [210000 + (90,000/.60)] / 3.00 120,000 units

Answer 1

1	Contribution margin per unit	=	(Sales - Variable Costs)/Sales units
	Variable costs	=	700,000.00
	Sales	=	1,000,000.00
	Sales units	=	100,000 units
	Contribution margin per unit	=	($1,000,000 - 700,000)/100,000 =
			$3
	Fixed costs	=	$210,000 + 31,500
			241,500.00
	Break even sales in units	=	$241,500/$3
		=	80,500 units
2	Target profit after tax	=	90,000.00
	Tax rate	=	21%
	Target profit before tax	=	90,000/(1-21%)
			113,924.05
	Units to be sold to earn $90,000 after tax	=	(Fixed costs+target profit before tax)/contribution margin per unit
		=	($241,500+113924.05)/3
		=	118,474.68 units
This can be rounded off to 118,475