The Holiday Card Company, a producer of speciality cards, has asked you to compl
ID: 2502787 • Letter: T
Question
The Holiday Card Company, a producer of speciality cards, has asked you to complete several calculations based upon the followin information:
Income Tax rate: 40%
Selling price per unit: $7.90
Varibale cost per unit: $5.78
Total Fixed Cost: $84,800.00
Required:
a) What is the unit contribution margin?
b) What is the contribution margin ratio?
c) what is the break even point in cards?
d) If your sales doubled,
-What would be the effect on total fixed costs? Total variable costs?
- What would be the degree of operating leverage?
e) What sales volume is needed to earn an after-tax nest income of $13,028.40? how may cards must be sold?
Explanation / Answer
The Holiday Card Company, a producer of speciality cards, has asked you to complete several calculations based upon the followin information:
Income Tax rate: 40%
Selling price per unit: $7.90
Varibale cost per unit: $5.78
Total Fixed Cost: $84,800.00
Required:
a) What is the unit contribution margin?
the unit contribution margin = Selling price per unit-Varibale cost per unit
the unit contribution margin = 7.90-5.78
the unit contribution margin =$ 2.12
b) What is the contribution margin ratio?
contribution margin ratio = unit contribution margin/Selling price per unit
contribution margin ratio = 2.12/7.90
contribution margin ratio = 26.84%
c) what is the break even point in cards?
Break even point in cards = Total Fixed Cost/the unit contribution margin
Break even point in cards = 84800/2.12
Break even point in cards = 40000
d) If your sales doubled,
-What would be the effect on total fixed costs? Total variable costs?
- What would be the degree of operating leverage?
The effect on total fixed costs wil be nill i.e Total fixed Cost will remain same = $ 84800
The effect on Total variable costs will be doubled
the degree of operating leverage will increase
e) What sales volume is needed to earn an after-tax nest income of $13,028.40? how may cards must be sold?
after-tax net income of $13,028.40
Before-tax nest income of = $13,028.40/(1-taxrate)
Before-tax nest income of = $13,028.40/(1-0.40)
Before-tax nest income of = 21714
Fixed Cost = 84800
Contribution Required = 21714+84800
Contribution Required = 106514
Cards must be sold to achieve an after-tax net income of $13,028.40 = Contribution Required/unit contribution margin
Cards must be sold to achieve an after-tax net income of $13,028.40 = 106514/2.12
Cards must be sold to achieve an after-tax net income of $13,028.40 = 50242.45 Unit
Cards must be sold to achieve an after-tax net income of $13,028.40 = 50242 Unit or 50243 Unit
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