Question

Cost-Volume Profit Analysis
Hailstorm Company sells a single product for $22 per unit. Variable costs are $14 per unit and fixed costs are $80,000 at an operating level of 7,000 to 12,000 units.

a. What is Hailstorm Company's break-even point in units?

____ units

b. How many units must be sold to earn $12,000 before income tax?

____ units

c. How many units must be sold to earn $13,000 after income tax, assuming a 35% tax rate?

_____ units

Answer 1

a. Break Even point in units = Fixed Cost / Contribution Margin per unit

= $ 80,000 / ( Selling price per unit - variable cost per unit)

= $ 80,000 / ( $ 22 - $14)

= 10,000 units

Hence the correct answer is 10,000 units.

b. Required Profit = $ 12,000

Fixed cost = 80,000

Required contribution margin = required profit + fixed cost

= $ 12,000 + $ 80,000

= $ 92,000

contribution margin per unit = Selling price per unit - variable cost per unit

= $ 22 - $ 14

= $ 8

Hence, units to be sold to earn $12,000 before income tax = Required contribution margin/contribution margin per unit

= $ 92,000 / $ 8

= 11,500 units

Hence the correct answer is 11,500 units

c.

Required profit after tax = 13,000

Required Profit before tax =Required profit after tax/ (1- tax rate)

= $ 13,000 / (1-35%)

= $ 20,000

Fixed cost = 80,000

Required contribution margin = required profit + fixed cost

= $ 20,000 + $ 80,000

= $ 100,000

contribution margin per unit = Selling price per unit - variable cost per unit

= $ 22 - $ 14

= $ 8

Hence, units to be sold to earn $20,000 before income tax = Required contribution margin/contribution margin per unit

= $ 100,000 / $ 8

= 12,500 units

Hence the correct answer is 12,500 units