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

Exercise 46

Extensions of the CVP Model—Taxes

Action Games has developed a new computer game that it plans to sell for $32. The variable costs associated with each game (for materials, shipping, and packaging) amount to $7. The fixed costs associated with the game amount to $75,000 per year.

 Required

a. Compute the break-even point in units for the game.

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b. Assuming that the tax rate is 40 percent and the desired profit level is $120,000 after tax, compute the required unit sales level.

Step 1 of 2

a.

Break-even point (in units)

Break-even point is the level of operations (volume of sales) 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)

The selling price of the computer game is $32 and the variable cost associated with each game is $7 per game. The fixed costs are $75,000 per year.

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

Contribution margin per unit =

=

= $25 per unit

Now we calculate the break-even point (in units) for the game as follows:

Break-even point (in units) = 3,000 units

The company needs to sell 3,000 units (computer games) to break-even.