Josh Ward is a young entrepreneur preparing to start a compa

Josh Ward is a young entrepreneur preparing to start a company that will sell floating lounge chairs for use in private pools. As part of a loan package, the bank has asked him to prepare a business plan that includes a breakeven analysis. The lounge chairs will sell for $63 each and variable costs per unit are expected to be $45. Josh anticipates incurring $369,000 in fixed costs per year.

1) If Josh wants to generate annual operating income of $171,900, how many lounge chairs must he sell?

2)Assuming the company’s tax rate is 30%, how many lounge chairs must the company sell to generate annual net income of $134,883?

Solution

Breakeven analysis is where the contribution earned is equal to the fixed cost( so that fixed cost can be recovered).

formula to claculate break even point is = Total Fixed cost / contribution per unit

Contribution per unit = sale price per unit - variable cost per unit

i.e., $63 - $45 = $18

Break even point = $ 369000/ $18 = 20500 chairs (i.e. this much chairs must be sold to recover fixed cost)

1. Required annual operating income = $171900

+ Fixed cost to be recovered = $369000

------------

total amount to be recovered $540900

No of chairs to be produced to recover $540900 = $540900/$18 (contribution) = 30050 chairs

2. income to be genereated ( gross Taxes) $192690 ($134883/70%)

+ fixed cost to be recovered $369000

-------------

$561690

break even units to be produced = $561690/ $18 = 31205 chairs