Assume the following cost behavior data for Graphic Arts Company: $\begin{array}{lc}
\text { Sales price } & \$ 18.00 \text { per unit } \
\text { Variable costs } & \$ 13.50 \text { per unit } \
\text { Fixed costs } & \$ 22,500 \
\text { Tax rate } & 40 \%
\end{array}$ What volume of sales dollars is required to earn an after-tax income of $40,500?

Question

Quizplus · Accepted Answer

To find the sales volume required to earn an after-tax income of $40,500, first calculate the before-tax income needed, since the after-tax income is only 60% (100% - 40%) of the before-tax income. So, $40,500 is 60% of the before-tax income, which means the before-tax income needed is $40,500 / 0.6 = $67,500. To achieve a before-tax income of $67,500, add the fixed costs of $22,500 to get the total required contribution margin of $90,000 ($67,500 + $22,500). The contribution margin per unit is the sales price per unit minus the variable cost per unit, which is $18.00 - $13.50 = $4.50. To find the required sales in units, divide the total required contribution margin by the contribution margin per unit: $90,000 / $4.50 = 20,000 units. Finally, to find the sales dollars, multiply the number of units by the sales price per unit: 20,000 units * $18.00 = $360,000.

Assume the Following Cost Behavior Data for Graphic Arts Company