Break-Even Analysis for Hammerhead Charters

a. How many trips must Hammerhead sell to break even?

Required Calculation:

Break Even = Fixed Cost / Contribution per Unit

Fixed Cost = $6,000

Contribution per Unit = Selling Price - Variable cost per unit

Contribution per Unit = $50 - 20 = $30

b. How many trips must Hammerhead sell to earn a monthly operating profit of $9,000 after taxes?

Monthly Operating profit required = $9,000

Tax Rate = 25%

Before Tax Profit Required = 9,000 / (1-Tax rate)

Before Tax Profit Required = 9,000 / (1 - 0.25) = $12,000

Trips required to sell to earn a monthly operating profit of $9,000 after taxes = (6,000 + 12,000) / 30

1. Calculation of Break Even:

Break Even = Fixed Cost / Contribution per Unit

Fixed Cost = $6,000

Contribution per Unit = Selling Price - Variable cost per unit

Contribution per Unit = $50 - 20 = $30

Break Even = 6,000 / 30 Break Even = 200 trips

2. Trips required to sell to earn a monthly operating profit of $9,000 after taxes = (6,000 + 12,000) / 30 Trips required to sell to earn a monthly operating profit of $9,000 after taxes = 600

Trips required to sell to earn a monthly operating profit of $9,000 after taxes = 600 trips

Hammerhead Charters needs to sell 200 trips a month to break even and 600 trips a month to earn a monthly operating profit of $9,000 after taxes.

To break even, Hammerhead Charters must cover its fixed costs. Given the fixed costs are $6,000 per month and each trip yields a contribution margin of $30 (sales of $50 minus variable costs of $20 per trip), Hammerhead needs to sell 200 trips a month (6000 / 30) to break even.

To achieve a monthly operating profit of $9,000 after taxes, Hammerhead first needs to determine the pre-tax profit required. This is $9,000 / (1 - 0.25) = $12,000. Adding the fixed costs of $6,000, Hammerhead needs total contribution of $18,000 ($12,000 for profit and $6,000 to cover fixed costs). At a contribution of $30 per trip, this equates to 600 trips (18000 / 30).