Question

Prime Colors (PC) sells one-gallon cans of house paint at $25 each. The variable cost to produce each can is $17.50. Fixed operating costa are $1,500. PC normally sells 30,000 cans of paint each year. It has an interest expense of $300 and a marginal tax rate of 40%. Given this information, compute the operating breakeven point

Answer 1

Answer:

240 units

Explanation:

Data provided in the question:

Selling cost = $25

Cost of producing the can = $17.50

Fixed operating costs = $1,500

Interest expense = $1,500

Marginal tax rate = 40%

Now,

Profit before tax = sales Fixed Costs - Variable costs - Tax expenses

Let breakeven units be 'x'

Therefore,

Profit before tax = $25x - $1500 - 17.50x  - $300

or

Profit before tax = $25x - $1800 - $17.50x

or

Profit before tax = $7.50x - $1800

Tax @ 40% = 0.40($7.50x - $1800)

= $3x - $720

Profit after tax = $7.50x - $1800 - (3x - 720)

= 4.50x - 1080

also,

At the breakeven point

Total profit = 0

Thus,

$4.50x - $1080 = 0

or

x = 240 units