Time-Adjusted Cost-Volume-Profit Analysis with Income Taxes

Honeydukes Treat Shop is considering the desirability of producing a new chocolate candy called Pleasure Bombs. Before purchasing the new equipment required to manufacture Pleasure Bombs, Neville Long, the shop's proprietor performed the following analysis:

Unit selling price $1.98 Variable manufacturing and selling costs 1.73 Unit contribution margin $0.25 Annual fixed costs Depreciation (straight-line for 4 years) $19,000 Other (all cash) 45,000 Total $64,000

Annual break-even sales volume = $64,000 / $0.25 = 256,000 units

Because the expected annual sales volume is 160,000 units, Long decided to undertake the production of Pleasure Bombs. This required an immediate investment of $87,000 in equipment that has a life of four years and no salvage value. After four years, the production of Pleasure Bombs will be discontinued.

With a 40 percent tax rate and a 8 percent time value of money, determine the annual unit sales required to break even on a time-adjusted basis. Assume straight-line depreciation is used to determine tax payments.