# Odd Wallow Drinks is considering adding a new line of fruit juices to its merchandise products....

## Question:

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% Required: (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?

#### (a)

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. #### (b) 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
Income Statement
Sales (392,000 cases * $75 per case)$29,400,000
Variable cost (392,000 cases * $36 per case) 14,112,000 Contribution margin 15,288,000 Fixed costs 12,168,000 Operating income 3,120,000 Tax expense (40%) 1,248,000 Net income$1,872,000