Olivian Company wants to earn $420,000 in net (after-tax) income next year. Its product is priced at $275 per unit. Product costs include:
Direct materials ……. $90
Direct labor ………. $65
Variable overhead ……. $16
Total fixed factory overhead …. $440,000
Variable selling expense is $14 per unit; fixed selling and administrative expense totals $290,000. Olivian has a tax rate of 40 percent.
1. Calculate the before-tax profit needed to achieve an after-tax target of $420,000.
2. Calculate the number of units that will yield operating income calculated in Requirement 1 above.
3. Prepare an income statement for Olivian Company for the coming year based on the number of units computed in Requirement 2.
4. What if Olivian had a 35 percent tax rate? Would the units sold to reach a $420,000 target net income be higher or lower than the units calculated in Requirement 3? Calculate the number of units needed at the new tax rate.