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Horngren Chapter 3: Emma Frost's GMAT Success package, break-even with taxes

ToolBreak-Even and Pricing
SourceHorngren, C. T., Datar, S. M., and Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis, 15th ed. Pearson, Boston. Chapter 3, Emma Frost / GMAT Success.
LevelUndergraduate

Problem

Emma Frost sells a GMAT Success package for $200 that costs her $120, paying $2,000 for the booth. Find the break-even point, the units needed for an operating income of $1,200 and for a net income of $960 at a 40 % tax rate, and the margin of safety and operating leverage at 40 units; compare the leverage of a $800 fixed fee with $150 variable cost and of no fee with $170 variable cost.

Inputs to Enter

  • Single-product CVP: fixed costs 2,000, variable cost 120, price 200, volume 40, target profit 1,200, tax rate 40 %, target net income 960
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Answers

  • CM per unit $80, 40 %; break-even 25 units or $5,000 revenue
  • Target operating income $1,200: 40 units, $8,000 revenue; target net income $960 at 40 % tax → operating income $1,600 → 45 units; net income at 40 units $720
  • Margin of safety $3,000 = 37.5 % = 15 units; DOL 3,200/1,200 = 2.67 (Option 1), 2,000/1,200 = 1.67 (Option 2), 1.00 (Option 3, no fixed cost, break-even 0 units)

Notes

Replace the Acoustic Concepts defaults with these inputs; run Options 2 and 3 by changing the fixed and variable costs.

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