Question

. The following is Allison Corporation's contribution format income statement for last month: Sales $700,000 Variable expenses 300,000 Contribution margin 400,000 Fixed expenses 300,000 Net operating income $100,000 The company has no beginning or ending inventories. The company produced and sold 10,000 units last month.

(a) How many units would the company have to break even?

(b) How many units would the company have to sell to attain target profits of $150,000 after tax when tax rate is 40%?

Answer 1

Sales	$        700,000
Less:- Variable Cost	$        300,000
Contribution	$        400,000
Less:- Fixed Cost	$        300,000
Profit before tax	$        100,000

Units produced and sold :- 10,000 units

(a)	Break Even Point (in units)	=	Fixed Cost
			Contribution per unit
		=	300000
			40
		=	7500 units
	Contribution Per Unit	=	Contribution
			Units Sold
		=	400000
			10000
		=	40 per unit

(b)	Desired Sales (in units)	=	Fixed Cost + Desired Profit before tax
			Contribution per unit
		=	300000 + 250000 (150000/60%)
			40
		=	13750 units

Therefore, company have to sell 13,750 units to earn desired profit of Rs. 1,50,000 before tax.