Dunkin Company manufactures and sells a single product that sells for $480 per unit; variable costs are $300. Annual fixed costs are $990,000. Current sales volume is $4,200,000. Dunkin company management targets an annual after-tax income of $843,750. The company is subject to a 25% income tax rate. Compute the unit sales to earn the target after-tax net income.

Question

Quizplus · Accepted Answer

First, we need to calculate the total fixed costs, which is $990,000.

Next, we need to calculate the pre-tax income target:

Target Pre-tax Income = Target After-tax Income / (1 - Tax Rate)

Target Pre-tax Income = $843,750 / (1 - 0.25) = $1,125,000

Using the contribution margin (selling price - variable cost), we can calculate the number of units needed to be sold to achieve the target pre-tax income:

Contribution Margin = Selling Price - Variable Cost = $480 - $300 = $180

Break-even Point (in units) = (Total Fixed Costs + Target Pre-tax Income) / Contribution Margin

Break-even Point (in units) = ($990,000 + $1,125,000) / $180 = 11,750

Therefore, Dunkin Company needs to sell 11,750 units to earn the target after-tax net income. The answer is D.

Dunkin Company Manufactures and Sells a Single Product That Sells