Question

Carter Manufacturing Company manufactures exclusive pens which sell for $71 per unit. Its unit variable costs are $50 and fixed expenses are $389,500. The company pays income tax at the rate of 40%.

Required:

1.	How many units must Carter sell to earn an after-tax income of $24,600?

     

2.	Re-compute the sales level to earn the above-mentioned after-tax income if the tax rate changes to 20%.

     

Answer 1

1.Required Before tax profit = $ 24,600 / 60%

= $ 41,000

Required Contribution = Required Before tax profit + Fixed cost

= $ 41,000+ $ 389,500

= $ 430,500

Contribution Margin =Selling price - variable cost

= $ 71 - $ 50

= $ 21

The  units must Carter sell to earn an after-tax income of $24,600 = Required Contribution /  Contribution Margin

= $ 430,500 / $ 21

= 20,500 Units

Hence the correct answer is 20,500 Units

b.

Required Before tax profit = $ 24,600 / 80%

= $ 30,750

Required Contribution = Required Before tax profit + Fixed cost

= $ 30,750+ $ 389,500

= $ 420,250

Contribution Margin =Selling price - variable cost

= $ 71 - $ 50

= $ 21

The  units must Carter sell to earn an after-tax income of $24,600 = Required Contribution /  Contribution Margin

= $ 420,250/ $ 21

= 20,012 Units

Hence the correct answer is 20,012 Units