A firm produces and sells a product with a contribution margin of $32 per unit. The firm is presently selling 90,000 units and earning $240,000 in after-tax income. Taxes are $80,000 at a 25% tax rate. If the firm desires to increase its after-tax income to $300,000, how many more units must it sell?

9514 1404 393

  2500 more units

Explanation:

The after-tax contribution margin per unit is ...

  $32 - 25%×$32 = $32 -8 = $24

To increase the after-tax income from $240,000 to $300,000, an increase of ...

  $300,000 -240,000 = $60,000

is required. If each unit contributes $24 in after-tax income, then the number of additional units required is ...

  $60,000/($24/unit) = 2500 units

The firm must sell 2500 more units to make the desired increase in after-tax income.