Question

Fred’s Farm has the following costs and returns last year. $200,000 in revenue, $100,000 in input costs, $45,000 in labor, and $20,000 in overhead expenses. He paid $10,500 in income taxes. Use this information to answer the following questions. Hint: You will need to build the sensitivity analysis spread sheet.

1. How much before tax profit did Fred have last year and what is his average tax rate? What was his net income after tax?
2. Fred is considering raising his prices. What will a 10% increase in Fred’s prices do to his net income? (Provide new net income, and percentage change)
3. Fred is concerned that prices for his inputs (seed, fertilizer, fuel, et) may increase. What happens if Fred’s input prices increase by 5%? ((Provide new net income, and percentage change)
4. Fred is considering expanding. He would like to increase by 15%. He feels his labor would only increase by 5% and overhead would not increase. What would the results of the expansion be? (Provide new net income, and percentage change)

Answer 1

a.

Revenue (A)	$      2,00,000.00
Input Cost (B)	$      1,00,000.00
Labour (C )	$          45,000.00
Overheads (D)	$          20,000.00
Profit before tax (E = A - B - C - D)	$          35,000.00
Income Tax @ 30% of E = (F)	$          10,500.00
Net Income after tax (G = E - F)	$          24,500.00
Average Tax rate (H = F/A*100)	5.25%

b. (in comparison to a. above)

Revenue (A)	$      2,20,000.00
Input Cost (B)	$      1,00,000.00
Labour (C )	$          45,000.00
Overheads (D)	$          20,000.00
Profit before tax (E = A - B - C - D)	$          55,000.00
Income Tax @ 30% of E = (F)	$          16,500.00
New Net Income after tax (G = E - F)	$          38,500.00
Excess of G over G in a. solution = H	$          14,000.00
Percentage change I = H/Old G * 100	57.14%

c. (In comarison to a. above)

Revenue (A)	$      2,20,000.00
Input Cost after 5% rise (B)	$      1,05,000.00
Labour after 5% rise (C )	$          47,250.00
Overheads after 5% rise (D)	$          21,000.00
Profit before tax (E = A - B - C - D)	$          46,750.00
Income Tax @ 30% of E = (F)	$          14,025.00
New Net Income after tax (G = E - F)	$          32,725.00
Excess of G over G in a. solution = H	$            8,225.00
Percentage change I = H/G in a. * 100	33.57%

d. (In comparison to c. above)

Revenue after 15% expansion (A)	$      2,53,000.00
Input Cost after 15% expansion (B)	$      1,20,750.00
Labour after 5% expansion (C )	$          49,612.50
Overheads (no change) (D)	$          21,000.00
Profit before tax (E = A - B - C - D)	$          61,637.50
Income Tax @ 30% of E = (F)	$          18,491.25
New Net Income after tax (G = E - F)	$          43,146.25
Excess of G over G in c. solution = H	$          10,421.25
Percentage change I = H/G in c. * 100	31.84%