15-13B. (Break-even point and selling price) Heritage Chain Company will produce

Question

15-13B. (Break-even point and selling price) Heritage Chain Company will produce 175,000 units next year. All of this production will be sold as finished goods. Fixed costs will total $335,000. Variable costs for this firm are relatively predictable at 80 percent of sales.
a. If Heritage Chain wants to achieve an earnings before interest and taxes level of
$270,000 next year, at what price per unit must it sell its product?
b. Based on your answer to part (a), set up an analytical income statement that will verify your solution.

Explanation / Answer

Our Equation is this: Sales - (Variable Cost) - Fixed Cost = Earnings Before Interest Taxes We are given that EBIT is $270,000, FC is $335,000 and that Var Cost = (0.80 x Sales) our equation reduces to: Sales - (0.80 x Sales) - 335,000 = 270,000 If we solve for Sales we get $3,025,000. Divide this by units of 175,000 and we get $17.29 per unit for part a. For b, our Income Statement looks like this Sales $3,025,000 Variable cost $2,420,000 Fixed cost $335,000 EBIT $270,000 Hope this helps!

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