A company requires $600,000 in sales to meet its target net income after tax.Its contribution margin is 40%, and fixed costs are $80,000.How much is the target net income, given that its after-tax rate is 70%?

Question

Quizplus · Accepted Answer

First, we need to calculate the total variable cost as a percentage of sales:

Contribution Margin = Sales - Variable Costs 
40% = Sales - Variable Costs 
Variable Costs = 60% of Sales

Next, we can use the contribution margin ratio to find the break-even point:

Break-even Point = Fixed Costs / Contribution Margin Ratio 
Break-even Point = $80,000 / 40% 
Break-even Point = $200,000

To reach a target net income of $600,000, we need to add $400,000 in profit ($600,000 - $200,000 = $400,000).

To calculate the required sales to achieve this profit, we can use the following formula:

Sales = (Fixed Costs + Target Net Income) / Contribution Margin Ratio 
Sales = ($80,000 + $400,000) / 40% 
Sales = $1,200,000

Finally, we need to adjust for the after-tax rate of 70%:

Net Income After Tax = Target Net Income / (1 - Tax Rate) 
Net Income After Tax = $400,000 / (1 - 0.70) 
Net Income After Tax = $1,333,333

Therefore, the answer is D) $112,000.

A Company Requires $600,000 in Sales to Meet Its Target