Question

5. Shady's Inc. manufactures lampshades. The controller provides you with the following information from the coming year's budget: Income tax rate Variable cost per shade Total fixed costs Planned unit sales of lampshades 40% $2.50 $250,000 100,000 What is the selling price per lampshade that will achieve a desired after-tax operating income of $27,000? a) $2.77 b) $2.95 c) $5.27 d) $5.45

Answer 1

Let the selling price per unit be X

Now, we know that

(Sales – Variable Costs – Fixed Costs) = Before Tax Operating Income

So, Before Tax Operating Income

= Total units x Selling price per unit – Total units x Variable costs per unit – Total Fixed costs

= 100,000 X - 100,000 x $2.50 - $250,000

= 100,000 X - $250,000 - $250,000

Now, Before tax operating income x (1 – Tax rate) = After-Tax operating income

So, (100,000 X - $250,000 - $250,000) x (1 – Tax Rate) = $27,000

So, So, (100,000 X - $250,000 - $250,000) x (1 – 0.40) = $27,000

So, (100,000 X - $250,000 - $250,000) = $27,000 / 0.60

So, 100,000 X = $45,000 + $250,000 + $250,000

So, X = $545,000 / 100,000

= $5.45 per unit

So, as per above calculations, option d is the correct option