I need help understanding this breakeven stuff

  • Creator
    Topic
  • #199287
    rsiddiqui
    Participant

    Almo developed its business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected at $200, and the annual fixed-costs were budgeted at $100,000. Almo’s after-tax profit objective was $240,000; the company’s effective tax rate is 40 percent. If no changes are made to the selling price or cost structure, determine the number of units that Almo Company must sell in order to break-even.

    Why don’t you include the pretax profit in the calculation??

Viewing 12 replies - 1 through 12 (of 12 total)
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  • #753341
    monikernc
    Participant

    You do use the pretax in the calculation but you have to calculate the pretax income to do so.

    The after tax profit objective is $240,000 and the tax rate is 40%. Therefore, the pretax profit objective is $400,000 or $240,000/(1-.40)

    The breakeven + profit objective equation is then: (FC+$400,000)/CM or ($100,000+$400,000)/($400-$200) = $500,000/$200 = 2,500 units to achieve the after tax profit objective.

    Sales $400*2,500 = $1,000,000
    – VC $200*2,500 = – 500,000
    = CM $200*2,500 = 500,000
    – FC -100,000
    = OPG INC 400,000
    – TAXES (40%) -160,000
    = AFTER TAX INC 240,000

    FAR 7/25/15 76!
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    BEC 2/27/16 82
    REG 5/23/16 88!
    Ninja Book and MCQ and the forum - all the way!!!
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    #753342
    rsiddiqui
    Participant

    500 units must be sold to breakeven.
    Total fixed cost $100,000 ÷ contribution margin per unit of $200 = 500 units to breakeven.

    Thats the answer they gave and no where did they include pretax. Is it because it didn't say it in the question stem

    #753343
    monikernc
    Participant

    That is tricky word play. They gave all the info but all they want is the number of breakeven units not the number of units to get to the after tax profit. Yes, all the stem wants is the breakeven. It got me!!!

    FAR 7/25/15 76!
    AUD 10/30/15 93
    BEC 2/27/16 82
    REG 5/23/16 88!
    Ninja Book and MCQ and the forum - all the way!!!
    and a little thing i like to call, time and effort!
    if you want things to change, you have to do something different

    #753344
    rsiddiqui
    Participant

    could you help me with another question:

    Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were the following:
    Variable manufacturing costs
    $ 9
    Variable selling and administrative costs
    6
    Total
    $ 15
    Total fixed costs were $250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If Trendy had made this investment, what change would have occurred in Trendy's pretax profit?

    Why do we subtract 15,000 from total contribution margin of 12,000?

    #753345
    monikernc
    Participant

    Because they gave you the increase in sales dollars you use the CM ratio. SP$25-VC$15 = CM$10. This gives a CM ratio of CM/SP = 10/25 = .40 or 40%

    You multiply the increase in sales dollars by the CM ratio $30,000 * .40 = $12,000, this is the amount contributed to income due to the additional sales.

    You then deduct the additional advertising cost, which is a fixed cost, from that amount $12,000 – $15,000 = -$3,000 to get the change in pretax income.

    To do it the long way – an increase of $30,000 in sales means that $30,000/$25 = 1,200 additional units were sold.
    SP$25*1,200 = $30,000
    VC$15*1,200 = $18,000
    CM = $12,000
    increase in FC = -$15,000
    net effect = -$3,000 for the additional 1,200 units sold with an increase of $15,000 in fixed costs.

    FAR 7/25/15 76!
    AUD 10/30/15 93
    BEC 2/27/16 82
    REG 5/23/16 88!
    Ninja Book and MCQ and the forum - all the way!!!
    and a little thing i like to call, time and effort!
    if you want things to change, you have to do something different

    #753346
    monikernc
    Participant

    to play with this problem a little more let's figure out the new breakeven point given the increase in fixed costs for advertising:

    an increase in fixed costs of $15,000 will require an additional 1,500 units to be sold to breakeven. this is calculated by dividing the additional fixed costs of $15,000 by the CM of $10 = $15,000/$10 = 1,500 units

    or, to get the additional sales in dollars required to breakeven for the increase in fixed costs you use the CM ratio: $15,000/.40 = $37,500

    so now,
    SP$25*1,500 = $37,500
    VC$15*1,500 = $22,500
    CM$10*1,500 = $15,000
    +FC = $15,000
    and CM – FC = $15,000 – $15,000 = 0.

    FAR 7/25/15 76!
    AUD 10/30/15 93
    BEC 2/27/16 82
    REG 5/23/16 88!
    Ninja Book and MCQ and the forum - all the way!!!
    and a little thing i like to call, time and effort!
    if you want things to change, you have to do something different

    #753347
    rsiddiqui
    Participant

    So how come in the original question you dont subtract the 12,000 from the advertising+ fixed cost if advertising is fixed cost?

    #753348
    rsiddiqui
    Participant

    Also in that quesiton if they gave more than 1 expense to include in fix cost, which ones are fix? I know depreciation is fix so if they included advertising and depreciation would you add those two together and subtract 12,000

    #753349
    Skynet
    Participant

    “Breakeven” is when you have girlfriend and also dating another girl and got caught.

    The other girl you are seeing knees you in the gut for cheating on your girlfriend.

    Your girlfriend also knees you in the gut and Breaks up with you. So after kneeing you in the gut and breaking up with you, it is even for her.

    Thus is it how Breakeven is explained.

    #753350
    rsiddiqui
    Participant

    gotcha thanks for that. Could you guys help me with another question?

    Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
    Concerning AM-12, which one of the following alternatives is most advantageous?

    My question is why do you include joint cost in this when I thought joint cost wasn't relevant for marginal analysis (specifically Selling or processing?). How does someone go about solving this?

    #753351
    monikernc
    Participant

    No. Frankly, you are a bit annoying. There is a BEC study group thread but rather than use it, you post your questions repeatedly in the wrong location. You need to read your review materials and attempt the questions before asking for assistance. Our time is valuable and mine is reserved for those who first make an effort.

    FAR 7/25/15 76!
    AUD 10/30/15 93
    BEC 2/27/16 82
    REG 5/23/16 88!
    Ninja Book and MCQ and the forum - all the way!!!
    and a little thing i like to call, time and effort!
    if you want things to change, you have to do something different

    #753352
    ohiostategirlcpa
    Participant

    @ monikernc

    Agreed, I stopped answering him some time ago. If he wants a tutor he should pay for a tutor.

    Furthermore, I am starting to think I should be paid for my accounting services period. All that hard work put into studying accounting and passing tests is making me think that.

    F91 A95 R90 B94
    CMA since 2015
    (Gleim books/PDFs, MCQs, SIMS)

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