# 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?

## Answer and Explanation:

#### (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 |

#### Ask a question

Our experts can answer your tough homework and study questions.

Ask a question Ask a question#### Search Answers

#### Learn more about this topic:

from Accounting 102: Intro to Managerial Accounting

Chapter 3 / Lesson 5#### Explore our homework questions and answer library

#### Our tutors are standing by

Ask a study question and one of our experts will send you an answer within hours.

To ask a site support question, click here

### Your question has been submitted!

When your answer is ready, it will appear on your Dashboard.

New! Get a text message when your answer is ready

Get Text AlertsNew! Get a text message when your answer is ready

Thanks! We'll text you when your answer is ready!