Question Completion:
Eagle Company makes the MusicFinder, a sophisticated satellite radio. Eagle has experienced a steady growth in sales for the past five years. However, Ms. Luray, Eagle's CEO, believes that to maintain the company's present growth will require an aggressive advertising campaign next year. To prepare for the campaign, the company's accountant, Mr. Bednarik, has prepared and presented to Ms. Luray the following data for the current year, Year 1:
Variable costs:
Direct labor (per unit) $92
Direct materials (per unit) 39
Variable overhead (per unit) 15
Total variable costs (per unit) $146
Fixed costs (annual):
Manufacturing $386,000
Selling 292,000
Administrative 796,000
Total fixed costs (annual) $1,474,000
Selling price (per unit) $419
Expected sales revenues, Year 1 (23,000 units) $9,637,000
Eagle has an income tax rate of 30 percent.
Answer:
Eagle Company
The sales level in dollars required to equal the year 1 after-tax operating profit is:
$10,086,587.
Explanation:
a) Data and Calculations:
Selling price per unit $419
Total Variable cost per unit $146
Contribution per unit $273
Year 1 After-tax operating profit:
Sales revenue (23,000 * $419) = $9,637,000
Variable costs (23,000 * $146) = 3,358,000
Contribution (23,000 * $273) = $6,279,000
Total fixed costs (annual) = $1,474,000
Before Tax profit = $4,805,000
Income tax (30%) = 1,441,500
After-Tax profit = $3,363,500
To produce the same after-tax profit, which is equal to $3,363,500 with the additional $293,000 for advertising in year 2, the before tax profit will also be $4,805,000. And the new fixed costs will increase to $1,767,000 ($1,474,000 + $293,000).
Therefore, Sales unit to produce target profit of $4,805,000, equals to:
= (Fixed costs + Target profit)/Contribution margin per unit
= ($1,767,000 + $4,805,000)/$273
= 24,073 units
Sales level in dollars = 24,073 * $419 = $10,086,587
Check:
Variable cost = 3,514,658
Contribution 6,571,929
Fixed costs 1,767,000
Target profit 4,804,929 approx. = $4,805,000
