Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 33

CVP with Income Taxes

Crest Industries sells a single model of satellite radio receivers for use in the home. The radios have the following price and cost characteristics:

Sales price	$ 80 per radio
Variable costs	$ 32 per radio
Fixed costs	$360,000 per month

Crest is subject to an income tax rate of 40 percent.

Required

a. How many receivers must Crest sell every month to break even?

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b. How many receivers must Crest sell to earn a monthly operating profit of $90,000 after taxes?

Step 1 of 2

a.

Break-even point (in units)

Break-even point is the level of operations at which the sales revenue and total costs (variable costs and fixed costs) become equal. There is no profit or no loss at break-even point sales.

Break-even point (in units) can be calculated using the following equation

Break-even point (in units)

Sales price of the radio receiver is $80 per radio and variable cost is $32 per radio. The fixed costs are $360,000 per month.

Contribution margin is the profit earned by the company before adjusting for the fixed costs.

Now we calculate the break-even point (radio receivers) as follows:

The company needs to sell 7,500 radio receivers to break-even.