Delphi Company has developed a new project that will be marketed for the first t

Question

Delphi Company has developed a new project that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented as follows. Delphi is subject to a 40% income tax rate.

Delphi Company's management has stipulated that it will not approve the continued manufacture of the new product after the next fiscal year unless the after-tax profit is at least $75,000 the first year. The unit selling price to achieve this target profit must be at least

A. $34.60.

B. $37.00

C. $39.00

D. $36.60.

THANKS FOR THE HELP THIS IS ENGINEERING ECONOMICS CLASS

Variable Cost Direct Material $7 Direct Labor $3.50 Manufacturing Overhead $4 Total variable manufacturing cost $14.50 Selling Expenses $1.50 Total Variable Cost $16

Explanation / Answer

If unit selling price be P, then

Target profit after tax = [Revenue - Variable cost - Fixed cost] x (1 - Tax rate)

75,000 = [(P x 25,000) - (16 x 25,000) - 450,000] x (1 - 0.4)

75,000 = (25,000P - 400,000 - 450,000) x 0.6

75,000 = (25,000P - 850,000) x 0.6

125,000 = 25,000P - 850,000

25,000P = 975,000

P = $39

Correct option (C).

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