A company that sells its single product for $40 per unit had after-tax net income for the past year of $1,188,000 after applying an effective tax rate of 40%. The projected costs for manufacturing and selling its single product in the coming year are listed below.
Variable costs per unit $
Direct material 5
Direct labor 4
Manufacturing overhead 6
Selling and administrative costs 3
Total variable cost per unit 18
Annual fixed operating costs
Manufacturing overhead 6,200,000
Selling and administrative costs 3,700,000
Total annual fixed cost 9,900,000
The company has learned that a new direct material is available that will increase the quality of its product. The new material will increase the direct material costs by $3 per unit. The company will increase the selling price of the product to $50 per unit and increase its marketing costs by $1,575,000 to advertise the higher-quality product. The number of units the company has to sell in order to earn a 10% before-tax return on sales would be