Question:
AFTER-TAX TARGET INCOME, PROFIT ANALYSIS
Siberian Ski Company recently expanded its manufacturing capacity, which will allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The sales department assures management that it can sell between 9,000 and 13,000 pairs of either product this year. Because the models are very similar, Siberian Ski will produce only one of the two models.
The following information was compiled by the accounting department:
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Per-Unit (Pair) Data
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Mountaineering
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Touring
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Selling price
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$88.00
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$80.00
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Variable costs
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52.80
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52.80
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Fixed costs will total $369,600 if the mountaineering model is produced but will be only $316,800 if the touring model is produced. Siberian Ski is subject to a 40 percent income tax rate.
Required:
1. If Siberian Ski Company desires an after-tax net income of $24,000, how many pairs of touring model skis will the company have to sell?
2. Suppose that Siberian Ski Company decided to produce only one model of skis. What is the total sales revenue at which Siberian Ski Company would make the same profit or loss regardless of the ski model it decided to produce?
3. If the sales department could guarantee the annual sale of 12,000 pairs of either model, which model would the company produce, and why?