Question

Hammerhead Charters runs fishing trips out of the local port. Hammerhead charges $50 per trip for a half-day trip. Variable costs for Hammerhead total $20 per trip and the fixed costs are $6,000 per month. Hammerhead is subject to an income tax rate of 25 percent.
Required

a. How many trips must Hammerhead sell to break even?
b. How many trips must Hammerhead sell to earn a monthly operating profit of $9,000 after taxes?

Answer 1

Answer:

1. Calculation of Break Even:

Break Even = Fixed Cost / Contribution per Unit

Fixed Cost = $6,000

Contribution per Unit = Selling Price - Variable cost per unit

Contribution per Unit = $50 - 20 = $30

Break Even = 6,000 / 30  

Break Even = 200 trips

2. Monthly Operating profit required = $9,000

Tax Rate = 25%

Before Tax Profit Required = 9,000 / (1-Tax rate)

Before Tax Profit Required = 9,000 / (1 - 0.25) = $12,000

Trips required to sell to earn a monthly operating profit of $9,000 after taxes = (6,000 + 12,000) / 30  

Trips required to sell to earn a monthly operating profit of $9,000 after taxes = 600

Trips required to sell to earn a monthly operating profit of $9,000 after taxes = 600 trips