Assume the following cost behavior data for Alpha Arts Company: $\begin{array}{lc}
\text { Sales price } & \$ 20.00 \text { per unit } \
\text { Variable costs } & \$ 15.00 \text { per unit } \
\text { Fixed costs } & \$ 20,000 \
\text { Tax rate } & 30 \%
\end{array}$
What volume of sales dollars is required to earn a before-tax income of $25,000?

Question

Quizplus · Accepted Answer

To find the sales volume required to earn a before-tax income of $25,000, we use the formula: $$ \text{Required Sales} = \frac{\text{Fixed Costs} + \text{Desired Profit}}{1 - \text{Variable Cost Ratio}} $$ where the Variable Cost Ratio is $\frac{\text{Variable Costs per unit}}{\text{Sales price per unit}} = \frac{15}{20} = 0.75$. Plugging in the values: $$ \text{Required Sales} = \frac{20,000 + 25,000}{1 - 0.75} = \frac{45,000}{0.25} = 180,000 $$ Therefore, $180,000 in sales dollars is required to earn a before-tax income of $25,000.

Assume the Following Cost Behavior Data for Alpha Arts Company