Question

After-Tax Profit Targets Olivian Company wants to earn $360,000 in net (after-tax) income next year. Its product is priced at $300 per unit. Product costs include: Direct materials $90.00 Direct labor $66.00 Variable overhead $15.00 Total fixed factory overhead $445,000 Variable selling expense is $12 per unit; fixed selling and administrative expense totals $295,000. Olivian has a tax rate of 40 percent.
Required:
a. Calculate the before-tax profit needed to achieve an after-tax target of $420,000.
b. Calculate the number of units that will yield operating income.

Answer 1

Answer:

(A) $700,000

(B) 12,308 units

Explanation:

(A) The before-tax profit that is needed to achieve an after-tax target of $420,000 can be calculated as follows

= after-tax income/1-tax rate

= $420,000/(1-40/100)

= $420,000/1-0.4

= $420,000/0.6

= $700,000

(B) The number of units that will yield operating income can be calculated as follows

= desired contribution margin/Contribution margin per unit

Desired contribution margin= $445,000 + $295,000 + $700,000

= $1,440,000

Contribution margin per unit= 300-(90+66+15+12)

= 300-183

= 117

Therefore the number of units that will yield the operating income is

= 1,440,000/117

= 12,308 units