Odd Wallow Drinks is considering adding a new line of fruit juices to its merchandise products. This line of juices has the following prices and costs:
|Selling price per case (24 bottles) of juice||$75|
|Variable cost per case (24 bottles) of juice||$36|
|Fixed costs per year associated with this product||$12,168,000|
|Income tax rate||40%|
(a) Compute Odd Wallow Drinks' break-even point in units per year.
(b) How many cases must Odd Wallow Drinks sell to earn $1,872,000 per year after taxes on the juice?
Answer and Explanation:
The break-even point in units can be computed using the following formula:
- Break-even point in units = Total fixed costs / Contribution margin per unit
The contribution margin per unit is calculated as follows:
- Contribution margin per unit = Selling price per unit - Variable cost per unit
- Contribution margin per unit = $75 per case - $36 per case = $39 per case
- Break-even point in units = $12,168,000 / $39 per case = 312,000 cases
Odd Wallow Drinks needs to sell 312,000 cases to break-even.
To calculate the pre-tax profit use the following formula:
- Pre-tax profit = After-tax profit / ( 1 - Tax rate)
- Pre-tax profit = $1,872,000 / (1 - 40%) = $1,872,000 / 60% = $3,120,000
Now we can calculate how many cases need to be sold to achieve this level of profit.
- Target units = (Fixed costs + Pre-tax profit) / Contribution margin per unit
- Target units = ($12,168,000 + $3,120,000) / $39 per case = $15,288,000 / $39 per case = 392,000 units
Odd Wallow Drinks needs to sell 392,000 cases to earn an after-tax profit of $1,872,000.
|Odd Wallow Drinks|
|Sales (392,000 cases * $75 per case)||$29,400,000|
|Variable cost (392,000 cases * $36 per case)||14,112,000|
|Tax expense (40%)||1,248,000|
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from Accounting 102: Intro to Managerial AccountingChapter 3 / Lesson 5
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