E10-13. Effect of Taxes on Break-Even and Target Volume LO6 Yosemite Enterprises desires to earn an after-tax income of $150,000. It has fixed costs of $1,000,000, a unit sales price of $500, and unit variable costs of $200. The company is in the 30% tax bracket. 1. How many dollars of sales revenue must be earned to achieve the after-tax profit of $150,000? 2. How many dollars of revenue would have to be earned to achieve $150,000 of profit, if there had been no income tax?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
![**Exercise 10-13**
1. **Dollars of Sales Revenue Needed to Achieve Target Net Income**
a. **Target net income**
\[\$ 150,000\]
b. **1 - Tax rate**
\[0.76\]
c. **a ÷ b**
\[\$ 197,368\]
d. **Fixed costs**
\[\$ 1,000,000\]
e. **(c) + (d)**
\[\$ 1,197,368\]
f. **Contribution margin ratio**
\[0.59\]
g. **(e) ÷ (f)**
\[\$ 2,023,810\]
2. **Dollars of Sales Revenue Needed to Achieve Target Net Income**
a. **Target net income**
[Empty space for input]
b. **Fixed costs**
[Empty space for input]
c. **(a) + (b)**
[Empty space for input]
d. **Contribution margin ratio**
[Empty space for input]
e. **(c) ÷ (d)**
[Empty space for input]
**Explanation:**
The diagrams presented are tables meant to calculate the sales revenue necessary to achieve a specific target net income. The first table provides an example with specific numerical values filled in the cells. The second table is a template left blank for input.
1. In the first table, the target net income is \$150,000. The tax rate conversion (1 - tax rate = 0.76) is used to adjust this target to account for taxes, leading to \$197,368 when divided. With fixed costs of \$1,000,000 added, the subtotal is \$1,197,368. Dividing this by the contribution margin ratio of 0.59 results in total sales revenue of \$2,023,810 needed to achieve the target net income.
2. The second table follows the same format but allows for different numerical inputs to be applied based on new scenarios or exercises.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ffa7b4b4c-c86f-4dc7-8cf8-56d4a23b953f%2Fdcda8650-557b-4ff8-a77a-69ae40edd25c%2Fl0a2phx_processed.png&w=3840&q=75)
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