Question

EB7.

LO 3.2Delta Co. sells a product for $150 per unit. The variable cost per unit is $90 and fixed costs are $15,250. Delta Co.’s tax rate is 36% and the company wants to earn $44,000 after taxes.

What would be Delta’s desired pre-tax income?
What would be break-even point in units to reach the income goal of $44,000 after taxes?
What would be break-even point in sales dollars to reach the income goal of $44,000 after taxes?
Create a contribution margin income statement to show that the break-even point calculated in B, generates the desired after-tax income.

Answer 1

What would be Delta’s desired pre-tax income?

It can be calculated as follow.

As after tax earning is 64% (100-36(tax rate))of of pretax earning, so

Post tax earning = 44,000/64% = $ 68,750

What would be break-even point in units to reach the income goal of $44,000 after taxes?

This can be calculated by dividing the sum of post tax earning and fixed cost with contribution per unit,

Break even = (68,750 + 15,250)/ (150-90) = 1400 units

What would be break-even point in sales dollars to reach the income goal of $44,000 after taxes?

Break even (in dollars) = sale price * Break even units

= 210,000 dollars

Create a contribution margin income statement to show that the break-even point calculated in B, generates the desired after-tax income.

Sales $ 210,000

Variable cost ($ 126,000)

Gross profit $ 84,000

Fixed Cost ($ 15,250)

Profit before Tax $ 68,750

Tax expense ($ 24,750)

Profit After Tax $ 44,000