Ratio of total contribution margin to net income before taxes = €50,000/€14,000 = 3.57 Operating leverage = Total fixed cost/Total cost = €36,000/[5,000 kgs × €10 + €36,000] = 42%.
Francois French wants to increase after-tax profits to €35,000. Assuming sufficient demand, which strategy achieves this goal?
A. Sell 7,100 kgs at the present price
B. Pay the dairy €1/kg less and sell 7,500 kgs
C. Sell 8,000 kgs at €20.79/kg
D. Sell 7,500 kgs at the present price and eliminate the sales commission
E. None of the above
E. None of the above
While choice c meets the profit target, it exceeds plant capacity. To generate an after tax profit of €35,000 require a before-tax profit of €50,000 (€35,000/.7). So to cover the fixed costs of €36,000 and the after-tax profits of €50,000, the total contribution margin must be €86,000. If the price were set at 20.79 (and assuming you can sell 8,000 kgs at this price) then €20.79 - (€4 + €2 + €3) - €1.04 = €10.75 × 8,000 = €86,000.
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