Question

Cornerstone Exercise 16.4 (Algorithmic)
After-Tax Profit Targets

Olivian Company wants to earn $420,000 in net (after-tax) income next year. Its product is priced at $250 per unit. Product costs include:

Direct materials	$75.00
Direct labor	$55.00
Variable overhead	$12.50
Total fixed factory overhead	$425,000

Variable selling expense is $10 per unit; fixed selling and administrative expense totals $275,000. Olivian has a tax rate of 40 percent.

Required:

1. Calculate the before-tax profit needed to achieve an after-tax target of $420,000.
$

2. Calculate the number of units that will yield operating income calculated in Requirement 1 above. If required, round your answer to the nearest whole unit.
  units

3. Prepare an income statement for Olivian Company for the coming year based on the number of units computed in Requirement 2. Do NOT round interim calculations and, if required, round your answer to the nearest dollar.

Olivian Company
Income Statement
For the Coming Year
		Total
		$
		$
		$
		$

4. What if Olivian had a 35 percent tax rate? Would the units sold to reach a $420,000 target net income be higher or lower than the units calculated in Requirement 2?
- Select your answer -HigherLowerCorrect 1 of Item 3

Calculate the number of units needed at the new tax rate. In your calculations, round before-tax income to the nearest dollar. Round your answer to the nearest whole unit.
  units

Answer 1

Total variable costs per unit = $ 75 + $ 55 + $ 12.50 + $ 10 = $ 152.50

Contribution margin per unit = $ 250 - $ 152.50 = $ 97.50

Total Fixed Costs = $ 425,000 + $ 275,000 = $ 700,000.

1.  The before-tax profit needed to achieve an after-tax target of $420,000 = $ 420,000 / ( 1 - 0.40 ) =  $ 700,000
2. The number of units that will yield operating income calculated in Requirement 1= $ ( 700,000 + 700,000 ) / $ 97.50 = 14,359 units.

3.

Olivian Company Income Statement For the Coming Year
Sales ( 14,359 x $ 250)	$ 3,589,750
Less: Variable Costs ( 14,359 x $ 152.50)	2,189,750
Contribution Margin	$ 1,400,000
Less: Fixed Expenses	700,000
Income before Taxes	700,000
Tax @ 40 %	280,000
Net Income	420,000

4. Lower

Before tax income = $ 420,000 / ( 1 - 0.35 ) = 646,154

Number of unit sales required to earned $ 646,154 = $ ( 700,000 + 646,154 ) / $ 97.50 = 13,807 units.