3-22 (2025 min.) CVP analysis, income taxes.

1. Variable cost percentage is $3.40 $8.50 = 40%

Let R = Revenues needed to obtain target net income
R 0.40R $459,000 =
30 . 0 1
100 , 107 $

0.60R = $459,000 + $153,000
R = $612,000 0.60
R = $1,020,000

or,
Fixed costs + Target operating income
Target revenues
Contribution margin percentage
=
Target net income $107,100
Fixed costs + $459, 000
1 Tax rate 1 0.30
Target revenues $1, 020, 000
Contribution margin percentage 0.60
+

= = =


Proof: Revenues $1,020,000
Variable costs (at 40%) 408,000
Contribution margin 612,000
Fixed costs 459,000
Operating income 153,000
Income taxes (at 30%) 45,900
Net income $ 107,100

2.a. Customers needed to break even:
Contribution margin per customer = $8.50 $3.40 = $5.10
Breakeven number of customers = Fixed costs Contribution margin per customer
= $459,000 $5.10 per customer
= 90,000 customers

2.b. Customers needed to earn net income of $107,100:
Total revenues Sales check per customer
$1,020,000 $8.50 = 120,000 customers

3. Using the shortcut approach:
Change in net income = ( )
Change in Unit
number of contribution 1 Tax rate
customers margin
| | | |
| |
| |
\ . \ .

= (170,000 120,000) $5.10 (1 0.30)
= $255,000 0.7 = $178,500
New net income = $178,500 + $107,100 = $285,600

Alternatively, with 170,000 customers,
Operating income = Number of customers Selling price per customer
Number of customers Variable cost per customer Fixed costs
= 170,000 $8.50 170,000 $3.40 $459,000 = $408,000
Net income = Operating income (1 Tax rate) = $408,000 0.70 = $285,600

The alternative approach is:
Revenues, 170,000 $8.50 $1,445,000
Variable costs at 40% 578,000
Contribution margin 867,000
Fixed costs 459,000
Operating income 408,000
Income tax at 30% 122,400
Net income $ 285,600