Temecula Inc. sells a component for $75 per unit. Fixed costs total $1,200 and v
ID: 2499802 • Letter: T
Question
Temecula Inc. sells a component for $75 per unit. Fixed costs total $1,200 and variable costs are $60 per unit. Calculate the number of units that the company must sell if it desires to breakeven. Calculate the amount of sales revenue that the company must sell if it desires a $300 profit(ignore income taxes). Compute sales revenues if the company targets a profit margin of 10% (ignore income taxes). Assume Temecula ha a 30% income tax rate. Determine sales revenues if the firm targets $630 of net income. Ignoring income taxes, Temecula currently earns $300 profit by selling 100 units. The firm determines that it can lower variable cost to $50 per unit (from $60) if it is willing to incur an additional $800 in fixed costs. Should Temecula change its cost structure? A firm has $1,000,000 in its common stock account and $ 2,500,000 in its paid in capital account. The fiem issued 500,000 shares of common stock. There has only been one stock issue. What is the par value of the common stock? What was the original stock issue price?
Explanation / Answer
1-1
Break-even point in units = Fixed expenses/Contribution margin per unit
Contribution margin per unit = Selling price per unit – Variable cost per unit
= $75 per unit - $60 per unit
= $15 per unit
Break-even point in units = $1,200/$15 per unit
= 80 units
1-2
Amount of sales revenue to earn the desired profit = Fixed cost + Desired profit/Contribution margin ratio
Contribution margin ratio = Contribution margin per unit/Selling price per unit*100
= $15 per unit/$75 per unit*100
= 20%
Amount of sales revenue to earn the desired profit = $1,200 + $300/0.20
= $1,500/0.20
= $7,500
1-3
Total cost = Sales – Profit
= $7,500 - $300
= $7,200
Profit = 10% on total cost
= 10%*$7,200
= $720
Total sales revenue = Total cost + required profit
= $7200 + $720
= $7,920
Note: Since it is silent on which profit margin is to be calculate, it is assumed that profit margin of 10% is on total cost in previous part.
1-4
Profit before tax - tax expense = Net income
So net income will arise after deducting the tax expense from profit before tax and tax is at 30% that means net income is equal to 70%
So if net income at 70% equals to $630 then tax expense at 30% equal to
= 0.30*630/0.70
= $270
If we use these figures in the below equation, we will get the number which is equal to net income of $630.
Profit before tax – tax expense = Net income
Net income + Tax expense = Profit before tax
$630 + $270 = $900
Sales revenue = Total cost + Profit before tax
= $7,200 + $900
= $8,100
Particulars
Amount ($)
Sales
8,100
Less: total cost
7,200
Profit before tax
900
Less: tax expense
270
Net income
630
Therefore, the sales revenue if the firm targets a net income of $630 at a tax rate of 30% is $8,100.
1-5
Particulars
Current ($)
Proposed ($)
Revenues (100 units * $75 per unit)
7500
7,500
Less: Variable cost (100 units * $60 per unit) (100 units * $50 per unit)
6,000
5,000
Contribution margin
1,500
2,500
Less: Fixed cost ($1,200 + $800)
1,200
2,000
Income
300
500
Yes. Since the profit is increased from $300 to $500 from current situation to proposed situation, it is advisable to change its cost structure.
Particulars
Amount ($)
Sales
8,100
Less: total cost
7,200
Profit before tax
900
Less: tax expense
270
Net income
630
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