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


Learn more about this topic:

Target-Profit & Break-Even Analysis

from Accounting 102: Intro to Managerial Accounting

Chapter 3 / Lesson 5
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