Question

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

CANTON CORPORATION Income Statement for 20X1
Sales	$	236,800	(14,800 units at $16.00)
Cost of goods sold		148,000	(14,800 units at $10.00)
Gross profit	$	88,800
Selling and administrative expense		11,840
Depreciation		11,600
Operating profit	$	65,360
Taxes (30%)		19,608
Aftertax income	$	45,752

    
a. Assume in 20X2 the same 14,800-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 $10.00 per unit. Also assume selling and administrative expense will be 5 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute aftertax income for 20X2. (Do not round intermediate calculations. Round your answer to the nearest whole number.)
  

b. 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.)
  

c. Now assume that in 20X3 the volume remains constant at 14,800 units, but the sales price decreases by 15 percent from its year 20X2 level. Also, because of FIFO inventory policy, cost of goods sold reflects the inflationary conditions of the prior year and is $10.50 per unit. Further, assume selling and administrative expense will be 5 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.)
  

Answer 1

Answers

a: $61499.2

b:6.65%

c:$30336.32

(a)  

Sales	$260480 (17.6*14800)
Cost of goods sold	$148000
Gross profit	$112480
Selling and administrative expense	$13024
Depreciation	$11600
Operating profit	$87856
Taxes (30%)	$26356.8
After tax income	$61499.2

(b) After tax income 20x1= $45752

After tax income 20x2 = $61499.2

10% increase in sales price After tax income increased by = $ 61499.2 - $45752 = $15747.2

The percentage increased in after tax income as a result of 10% increase in selling price = $15747.2 / $236800 = 0.0665*100 = 6.65%

(c)

Sales	$221408 (14.96*14800)
Cost of goods sold	$155400 (10.5*14800)
Gross profit	$66008
Selling and administrative expense	$11070.4
Depreciation	$11600
Operating profit	$43337.6
Taxes (30%)	$13001.28
After tax income	$30336.32