# Chapter 16-2 Accounting Case

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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