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Head-Gear Company produces helmets for bicycle racing. Currently, Head-Gear charges a price of $230 per helmet. Variable costs are $80.50 per helmet, and fixed costs are $1,255,800. The tax rate is 25 percent. Last year, 14,000 helmets were sold. Required: 1. What is Head-Gear’s net income for last year? 2. What is Head-Gear’s break-even revenue? (Round to the nearest dollar.) 3. Suppose Head-Gear wants to earn before-tax operating income of $900,000. How many units must be sold? (Round to the nearest unit.) 4. Suppose Head-Gear wants to earn after-tax net income of $650,000. How many units must be sold? (Round to the nearest unit.) 5. Suppose the income tax rate rises to 35 percent. How many units must be sold for Head-Gear to earn after-tax income of $650,000? (Round to the nearest unit.)

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 16, Problem 16E
Textbook Problem
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Head-Gear Company produces helmets for bicycle racing. Currently, Head-Gear charges a price of $230 per helmet. Variable costs are $80.50 per helmet, and fixed costs are $1,255,800. The tax rate is 25 percent. Last year, 14,000 helmets were sold.

Required:

  1. 1. What is Head-Gear’s net income for last year?
  2. 2. What is Head-Gear’s break-even revenue? (Round to the nearest dollar.)
  3. 3. Suppose Head-Gear wants to earn before-tax operating income of $900,000. How many units must be sold? (Round to the nearest unit.)
  4. 4. Suppose Head-Gear wants to earn after-tax net income of $650,000. How many units must be sold? (Round to the nearest unit.)
  5. 5. Suppose the income tax rate rises to 35 percent. How many units must be sold for Head-Gear to earn after-tax income of $650,000? (Round to the nearest unit.)

1.

To determine

Compute the net income for the previous year.

Explanation of Solution

Net income: The bottom line of income statement which is the result of excess of earnings from operations (revenues) over the costs incurred for earning revenues (expenses) is referred to as net income.

Compute the net income for the previous year:

For the previous year
ParticularsAmount ($)
Sales (1)$3,220,000
Less: Variable cost (2)$1,127,000
Contribution margin$2,093,000
Less: Fixed cost $1,255,800
Operating income $837,200
Less: Income taxes (3)$209,300
Net income$627,900

Table (1)

The net income for the previous year is $627,900.

Working Note (1):

Compute the value of sales:

Sales=Unit Cost × Number of units sold

2.

To determine

Compute the break-even in sales revenue.

3.

To determine

Compute the number of units to be sold to generate the before-tax operating income of $900,000.

4.

To determine

Compute the number of units to be sold to generate the after-tax income of $650,000.

5.

To determine

Compute the number of units to be sold to generate the after-tax income of $650,000, if the tax rate increases.

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Chapter 16 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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