US CMA Part 2 · Chapter 5 · Question 4 of 15
Pryor Cycles wants to earn after-tax net income of $90,000. Its tax rate is 25%, selling price is $50 per unit, variable cost is $30 per unit and fixed costs are $260,000. How many units must it sell?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 19,000 units
Explanation
Convert the after-tax target to pre-tax: $90,000 / (1 - 25%) = $120,000. Required units = ($260,000 + $120,000) / ($50 - $30) = $380,000 / $20 = 19,000 units. Grossing up by multiplying by 1.25 ($112,500) understates the pre-tax profit needed, and ignoring tax gives 17,500 units.
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