[Anonymous]

Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device.

Direct labor $ 180

Direct materials 240

Factory overhead 105

Total variable production costs 525

Marketing costs 75

Total variable costs $ 600

Madengrad’s income tax rate is 40 percent, and annual fixed-costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last five years.

For Madengrad Company to achieve an after-tax net income of $540,000, annual sales revenue must be:

a. $21,420,000

b. $22,500,000

c. $23,850,000

d. $7,500,000

Explanation

Choice “b” is correct.

Step 1 − Calculate before tax income

Net income before tax − tax = Net income after tax

NIBT − .40 NIBT = NIAT

.60 NIBT = 540,000

NIBT = 900,000

Step 2 − Calculate number of units to achieve $900,000 net income before tax

Sales − variable cost – fixed cost = net income before tax = $900,000

($900 x units) – ($600 x units) – 6,600,000 = 900,000

$300 x units = 7,500,000

Number of units = 25,000

Step 3 – Calculate sales revenue based on number of units

25,000 units × $900 per unit = $22,500,000

Why is it that when I use the CM ratio to find sales dollars it isn’t working out? – sales=(FC + pretax profit)/CM ratio