Lwipa Chishimba produces solar panels. The company has annual fixed costs totali

ID: 2590693 • Letter: L

Question

Lwipa Chishimba produces solar panels. The company has annual fixed costs totaling $10, 000,000 and variable costs of $600 per unit. Each unit of product is sold for $1, 000.

Lwipa expects to sell 70,000 units this year. Assume a tax rate of 35 percent.

Required:

a. How many units must be sold to earn an annual profit of $2, 000,000 after taxes?

b. What amount of sales dollars is required to earn an annual profit of $500, 000 after taxes?

c. Refer to requirement a. What would happen to the number of units required to earn $2, 000,000 in operating profit if the company were a non-profit organization that did not incur income taxes? Explain. (Detailed calculations are not necessary but may be helpful in confirming your answer.) (10 marks)

Explanation / Answer

Answer

Particulars

(In $)

Sales

70,000,000

Variable cost

42,000,000

Contribution Margin

28,000,000

Fixed Cost

10,000,000

Net Income before tax

18,000,000

Tax @35%

6,300,000

Net income after Tax

11,700,000

Contribution per unit = 400 (1000-600) per unit

Let units to sell to earn after tax profit 2,000,000 = X

Profit = Contribution – Fixed cost – Tax @ (Contribution – Fixed cost)

2,000,000 = 400X – 10,000,000 – 35% (400X – 10,000,000)

2,000,000 = 400X – 10,000,000 – 140X + 3,500,000

2,000,000 = 260X – 6,500,000

X = 32,693 Units

Units to sell to earn a profit of 2,000,000 is 32,693 units

You can see that there will be some difference in profit, a minor one. This is because the units are in points and we can’t sell units in points, its whole unit and if we round off then there will be some difference.

Let units to sell to earn after tax profit 500,000 = X

Profit = Contribution – Fixed cost – Tax @ (Contribution – Fixed cost)

500,000 = 400X – 10,000,000 – 35% (400X – 10,000,000)

500,000 = 400X – 10,000,000 – 140X + 3,500,000

500,000 = 260X – 6,500,000

X = 26,923 Units

Units to sell to earn a profit of 500,000 is 26,923 units

As there is no income tax so Operating profit = Contribution – Fixed Cost

Let units to sell to earn after tax profit 2,000,000 = X

Profit = Contribution – Fixed cost

2,000,000 = 400X – 10,000,000

X = 30,000 Units

Units to sell to earn a Operating profit of 2,000,000 is 30,000 units

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