1.Imagine that the Walt Disney Company incurs $12,000 million of fixed costs to

Question

1.Imagine that the Walt Disney Company incurs $12,000 million of fixed costs to operate its theme parks. Also assume that the average ticket price is $91 and that the marginal cost of each additional park guest is $5. Assume they have no other costs or revenues.

Walt Disney has an effective tax rate of 32%. How many tickets must they sell to make an after-tax profit of $3,000 million?

2.

GrayCell budgeted $430,000 of fixed manufacturing, which they allocated over an activity base of 1,000 units. They actually produced 2700 units, actually incurred $330,000 in fixed manufacturing overhead, and actually sold 2300 units.

Indicate the choice that correctly fills in the blank to this sentence:

GrayCell’s reported income under absorption costing will be ___________ than their reported income under variable costing.

(Provide the dollar value and whether the value is higher or lower with a "H" or "L")

Explanation / Answer

Sales per unit = $ 91

Less : Variable Cost = $ 5

Contribution per ticket = $ 86 (91-5)

Fixed Cost = $ 12,000 millions

Desired Profit (after tax) = $ 3,000 million

Tax Rate = 32%

Desired Profit (Pre tax) = 3000m / (100-32%) = $ 4411.765 m

Number of tickets to be sold to earn desired profit = (Fixed Cost + Desired profit) / (Contribution per unit)

= ($ 12,000 + $ 4411.77) / 86 = 191 tickets

Q.2 = Higher

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