Shelton, Inc. manufactures and sells guitar strings. In this past year, they sold 150,000 feet of guitar strings at $ 10 / foot. On average, they incurred $2.75 of variable costs per foot of guitar strings and incurred $60,000 of fixed costs every month. They pay income tax of 25% annually. They are trying to project profit in the coming year. If the income tax rises from 25% to 35%, the break-even point in units will:

The question is not complete, here is the complete question:

Shelton, Inc. manufactures and sells guitar strings. In this past year, they sold 150,000 feet of guitar strings at $ 10 / foot. On average, they incurred $2.75 of variable costs per foot of guitar strings and incurred $60,000 of fixed costs every month. They pay income tax of 25% annually. They are trying to project profit in the coming year. If the income tax rises from 25% to 35%, the break-even point in units will:

Select one:

a. Increase

b. Decrease

c. Remain Constant

d. Cannot Determine

The correct answer is:

Increase (a)

Explanation:

First, let us calculate the net amount realized from sales, then compute the final amount after deduction of the tax expenses:

Length of string sold = 150,000 feet

selling price at $10/foot = 10 × 150,000 = 1,500,000

variable cost at $2.75/foot = 2.75 × 150,000 = $412,500

yearly fixed cost at $60,000 per month = $720,000

Total cost = 720,000 + 412,000 = $1,132,500

Net sales = 1,500,000 - 1,132,500 = $367,500

Next, if tax is charged at 25% on the net income, tax to be paid:

= 0.25 × 367,500 = $ 91,875

Net Profit = 367,500 - 91,875 = $275,625

if 35% on the net income, tax to be paid:

= 0.35 × 367,500 = $128,625

Net profit = 367,500 - 128,625 = $238,875.

Finally, to determine if break-even point increases to decreases let us define what break even point is:

Break even point is the excess of sales after the total cost of production has been deducted. In units, the break-even point is the unit of goods remaining after the units sold have covered up for the total cost of production, From this definition, it means that the lesser the break-even point, the more the profit, because more units of goods will be left to be added to the profit.

From out calculations above, when tax was increased from 25% to 35%, the profit reduced from $275,625 to $238,875, this means that the break even point will increase by that same amount, because reduction in profit means increase in break-even point.

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