Assume in 2014 the same 17,900-unit volume is maintained, but that the sales pri

Question

   

    

Assume in 2014 the same 17,900-unit volume is maintained, but that the sales price increases by 10 percent. Because of FIFO inventory policy, old inventory will still be charged off at $11.50 per unit. Also assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute aftertax income for 2014. (Do not round intermediate calculations. Round your answer to the nearest whole number.)

   

    

In part a, by what percent did aftertax income increase as a result of a 10 percent increase in the sales price? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

  

   

Now assume that in 2015 the volume remains constant at 17,900 units, but the sales price decreases by 15 percent from its year 2014 level. Also, because of FIFO inventory policy, cost of goods sold reflects the inflationary conditions of the prior year and is $12.00 per unit. Further, assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the aftertax income. (Round the sales price per unit to 2 decimal places but do not round any other intermediate calculations. Round your final answer to the nearest whole dollar amount.)

   

The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting.

Explanation / Answer

a.                                        INCOME STATEMENT FOR THE YEAR 2014

__________________________________________________________________________________

                                                                                                                                  $                               

SALES                              (17,900 x $20.9 (i.e. 19+10%))                                 $374,110

Cost of goods sold          (17,900 x 11.50)                                                        205,850

Hence, After tax income is $94,719

b. Percentage increase in after tax income when sales are increased by 6% in Part a

    After tax income of 2013             $ 72,341

    After tax income of 2014                94,719

    Increase in after tax income = 94,719 - 72,341 = $22,378

    Percentage increase or gian in after tax income is = (22,378/72,341) x 100 = 30.93%

c.                                       INCOME STATEMENT FOR THE YEAR 2015      

____________________________________________________________________________________

                                                                                                                                    $                                 

Sales                             (17,900 units x $17.77 (ie. 20.9 less 15%)                         318,083

Cost of goods sold        (17,900 units x $12)                                                            214,800

Gross Profit                                                                                                               103,283

Selling & Administrative expenese (6% of 318,083)                                                   19,084.98

Depreciaion                                                                                                                 10,500

Operating Profit                                                                                                          73,698.02

Tax (30%of 73,698.02)                                                                                               22,109.41  

After tax income                                                                                                          51,588.61

Hence, after tax income for 2015 is $51,588.61

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