758 Words4 Pages

Doyle’s contribution margin is :
Selling price per box $9.60 100%
Variable costs per box $5.76 60%
Contribution margin per box $3.84 40%
Break-even volume = Fixed CostsUnit Contribution
= 1,056,0003.84 = 275,000
To cover a 15% increase in variable production costs of candy and still maintain the current contribution margin percentage:
If variable production costs increase 15%:
VCNew = (VCOld) (1.15)
VCNew = (4.80)(1.15)
VCNew = 5.52
Total variable costs per unit are:
VC = 5.52 (production costs) + .96 (selling costs)
VC = 6.48
Contribution margin percentage (CMP) is calculated as follows:
CMP = UR - UVCUR where,
UR = Unit revenue and UVC = Unit variable costs
Solving for UR, this becomes:
UR = UVC1 - CMP
Substituting in the new VC in the above equation:
UR = 6.481 - .40 = UR = 6.48.60 = $10.80
The projected income statement for Doyle, absent any changes, is presented below:
Assuming a constant tax rate,
I = [(UR - UVC) (X)] - FC ;where,
X = production in units; FC = fixed costs; and,
I = income before taxes
To maintain current net income before taxes:
441,600 = [(9.60 - 5.76)(x)] - 1,056,000
3.12 x = 1,056,000 - 441,600
3.12 x = 1,497,600 x = 480,000
Note that the assumption of a constant tax rate was necessary if Doyle’s information was prepared considering Net Income after Tax. Note that because we assumed a constant tax rate Tax and Net Income after Tax as a percentage of Sales changed in the projected income statement, but Tax as a percentage of Income before Tax did not change. That is, because we assumed a constant tax rate, we were calculating “Income before Tax” in the above formula.
It is “real-life” problems such as the one described for Doyle’s, it is common to use Income

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