Rose Corporation manufactures a single electronic product called Precisionmix. T
ID: 2403876 • Letter: R
Question
Rose Corporation manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device:
Direct labor $180
Direct materials 240
Factory overhead 105
Total variable production costs 525
Marketing costs 75
Total variable costs $600
Rose’s income tax rate is 40%, and annual fixed costs are $4,000,000.
Required:
a) If Rose Corporation achieves a sales and production volume of 8,000 units, determine the net income (loss).
b) Determine the annual sales revenue to achieve an after tax net income of $540,000.
Explanation / Answer
Solution: a. Net income (loss) ($1,600,000) Working Notes: At 8000 units of volume Sales value $7,200,000 [selling price per unit x units sold ] [$900 x 8000 ] Less: Total Variable cost $4,800,000 [Total variable cost per unit x unit sold ] [$600 x 8,000 ] Contribution margin $2,400,000 Less: Fixed cost $4,000,000 Net loss ($1,600,000) As there is loss tax will not be payable so not charged b. Annual sales revenue 14,700,000 Working Notes: After tax net income = $540,000 therefore before tax net income = After tax net income /(1-tax rate ) = $540,000/(1-40%) =$540,000/60% =$900,000 Target contribution margin = Total fixed cost + Target before tax net income =$4,000,000 + $900,000 =$4,900,0000 Contribution margin per unit = Selling price per unit - variable cost per unit =$900 - $600 =$300 Target units sales = Target contribution margin / contribution margin per unit =$4,900,000/$300 =16,333.3333333 units Annual sales revenue to achieve $540,000 = Target units sales x selling price per unit =16,333.333333 x $900 =14,699,999.9997 =$14,700,000 Please feel free to ask if anything about above solution in comment section of the question.
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