How many sales are required to earn a target after-tax net income of $80,000 if total fixed costs are $100,000, the contribution margin ratio is 40%, and the tax rate is 25%?

Question

Quizplus · Accepted Answer

Step 1: Determine the contribution margin per unit
Contribution margin ratio = 40%
Selling price per unit - Variable cost per unit = Contribution margin per unit
Let's assume the selling price per unit is $10 and the variable cost per unit is $6
$10 - $6 = $4 contribution margin per unit

Step 2: Determine the breakeven point in units
Breakeven point (in units) = Total fixed costs ÷ Contribution margin per unit
$100,000 ÷ $4 = 25,000 units

Step 3: Determine the target net income before taxes
Target net income before taxes = Target after-tax net income ÷ (1 - Tax rate)
$80,000 ÷ (1 - 0.25) = $106,667

Step 4: Determine the sales required to achieve the target net income
Sales required = (Fixed costs + Target net income before taxes) ÷ Contribution margin ratio
($100,000 + $106,667) ÷ 0.4 = $516,667

Therefore, the answer is C ($516,667).

How Many Sales Are Required to Earn a Target After-Tax