Greene Banking Co. uses CVP analysis to consider the profitability of its automobile loan division. The target after-tax profit for all automobile loans (according to the budget this year) is $750,000. Greene sets the interest rates of automobile loans to return a target contribution margin (not considering the time value of money) of $1,500 per loan. The division incurs $150,000 in fixed costs every year. Greene's marginal tax rate is 25%.
The management team is concerned that certain costs previously classified as variable are actually fixed. If $100,000 of variable costs from last period were reclassified as fixed costs, how many additional loans need to be issued to break-even?

Question

Quizplus · Accepted Answer

The Answer of Greene Banking Co. uses CVP analysis to consider the profitability of its automobile loan division. The target after-tax profit for all automobile loans (according to the budget this year) is $750,000. Greene sets the interest rates of automobile loans to return a target contribution margin (not considering the time value of money) of $1,500 per loan. The division incurs $150,000 in fixed costs every year. Greene's marginal tax rate is 25%.
The management team is concerned that certain costs previously classified as variable are actually fixed. If $100,000 of variable costs from last period were reclassified as fixed costs, how many additional loans need to be issued to break-even?