Question

After-Tax Profit Targets Olivian Company wants to earn $360,000 in net (after-tax) income next year. Its product is priced at $350 per unit. Product costs include: $105.00 Direct materials Direct labor Variable overhead Total fixed factory overhead $77.00 $17.50 $400,000 Variable selling expense is $14 per unit; fixed selling and administrative expense totals $250,000. Olivian has a tax rate of 40 percent. Required: 1. Calculate the before-tax profit needed to achieve an after-tax target of $360,000. $ 600,000 2. Calculate the number of units that will yield operating income calculated in Requirement 1 above. If required, round your answer to the nearest whole unit. units

Answer 1

Before Tax Profit to achive an after tax profit of $360000 = After Tax Profit/(1-Tax Rate) =$360000/(1-0.40) =$600000

Number of unit that will yield profit $600000 Contribution Margin = (Price - Variable Costs)/ Price = (350-105-77-17.50-14) / 350 =39% Contribution Margin per unit = $350 *39% =136.5 Number of unit that will yield profit $600000 = Desired Profit + Fixed Cost / Contribution Margin per unit =($600000+400000+250000) / 136.5 =9157.51 =9158 units

Income Statement 3205300 1955233 Sales (9158 *350 per unit) Total Variable Expenses (105+77+17.5+14) * 9158 units Contribution Margin Total Fixed Expenses (400000+250000) Operating Income Less: Income Tax Net Income 1250067 650000 600067 240026.8 360040.2

There is difference due to rounding off hence I an providing alternate answer 3205233 1955233 Sales (9157.51 *350 per unit) Total Variable Expenses (105+77+17.5+14) * 9158 units Contribution Margin Total Fixed Expenses (400000+250000) Operating Income Less: Income Tax Net Income 1250000 650000 600000 240000 360000

If Tax Rate 35% Required Profit Before Tax = $360000/(1-0.35) =$360000/0.65 553846.15 Required Units = (553846.15+400000+25000)/136.5 per unit =8819.39 =8819 Units