Samuelson, Inc., has just purchased a $705,000 machine to produce calculators. T

Question

Samuelson, Inc., has just purchased a $705,000 machine to produce calculators. The machine will be fully depreciated by the straight-line method over its economic life of five years and will produce 52,000 calculators each year. The variable production cost per calculator is $10, and total fixed costs are $955,000 per year. The corporate tax rate for the company is 38 percent.

For the firm to break even in terms of accounting profit, how much should the firm charge per calculator?

Samuelson, Inc., has just purchased a $705,000 machine to produce calculators. The machine will be fully depreciated by the straight-line method over its economic life of five years and will produce 52,000 calculators each year. The variable production cost per calculator is $10, and total fixed costs are $955,000 per year. The corporate tax rate for the company is 38 percent.

Explanation / Answer

The amount to be charged per calculator should be $ 31.08

Let the price to be charged per calculator for accounting break-even be P.

Annual depreciation expense = $ 705,000 / 5 = $ 141,000

Total fixed cost = $ ( 955,000 + 141,000) x ( 1-0.38) = $ 679,520

After-tax contribution margin = $ ( P - 10) x (1 - 0.38)

BEP = Fixed cost / Contribution margin per unit = 52,000 or

679,520 / ( P-10) x 0.62 = 52,000 or 32,240P - 322,400 = 679,520

or P = $ 31.08

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