Question

Julianna Abdallah owns and operates FirstCakes, a bakery that creates personalized birthday cakes for a child’s first birthday. The cakes, which sell for $48 and feature an edible picture of the child, are shipped throughout the country. A typical month’s results are as follows:

Sales revenue		$840,480
Variable expenses		630,360
Contribution margin		210,120
Fixed expenses		112,200
Operating income		$ 97,920

(a)

• Your Answer
• Correct Answer (Used)

How many cakes will Julianna Abdallah have to sell if she wants to earn $126,456 in operating income each month?

cakes

(b)

Incorrect answer iconYour answer is incorrect.

Assuming a 30% tax rate, how many cakes will Julianna Abdallah have to sell if she wants to earn $114,660 in net income each month? (Round answer to 0 decimal places, e.g. 5,275.)

cakes

Answer 1

a. Cakes to be sold to earn $126,456 in operating income each month

Revenue to be earned for desired income = ( Fixed expenses + Desired operating income ) / Contribution margin ratio
where, contribution margin ratio = $210,120 / $840,480 = 25%.

Revenue to be earned for desired income = ( $112,200 + $126,456 ) / 25% = $954,624.

Cakes to be sold to earn $126,456 in operating income each month = Revenue to be earned for desired income / Selling price per unit = $954,624 / $48 = 19,888 cakes.

b. Cakes to be sold to earn $114,660 in operating income each month, assuming 30% tax rate

Revenue to be earned for desired income = ( Fixed expenses + Desired operating income ) / Contribution margin ratio
where, contribution margin ratio = $210,120 / $840,480 = 25%.

Desired operating income ( before taking tax effect of 30% ) = Desired operating income / ( 1- Tax rate ) = $114,660 / 70% = $163,800.

Revenue to be earned for desired income = ( $112,200 + $163,800 ) / 25% = $1,104,000.

Cakes to be sold to earn $114,660 in operating income each month = Revenue to be earned for desired income / Selling price per unit = $1,104,000 / $48 = 23,000 cakes.