Jassim Compagny is producing only one product. Two types of direct materials are

Question

Jassim Compagny is producing only one product. Two types of direct materials are used to produce this product direct material type A and direct material type B.
The estimated data for Jassim Compagny is as following:
 
Sales $90,000
Costs:
Direct materials type A $40,000
Hourly employees 15,000
Manager’s salary 10,000
Direct materials type B 5,000
Marketing 10,000
Total Costs 80,000
Budgeted pretax profit $ 10,000
 
The marketing costs include $5,000 that does not change with the change in sales volumes. The income tax rate is 20%.
 
a. Compute the revenues needed to achieve a target after-tax income of $30,000.
b. What is the margin of safety in revenue?

Explanation / Answer

After tax Income = 10000 x ( 1 -0.20 ) = 8000

a. Compute the revenues needed to achieve a target after-tax income of $30,000.

Fixed cost = $5000 (marketing costs)

Contribution margin = (sales - variable cost)/sales

                             = (90000 - ( 40000+15000+10000+5000+5000)) /90000 = 16.67%

Revenues = Fixed cost + target revenue / contribution margin

Revenues = 5000 + 30000 / 16.67% = 209958

b. What is the margin of safety in revenue?

Margin of safety = Sales - breakeven sales

Breakeven sales = Fixed cost / contribution margin = 5000 / 0.1667 = 29994

Margin of safety = 90000- 29994 = 60006

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