Question

Cornerstone Exercise 16.4 (Algorithmic)
After-Tax Profit Targets

Olivian Company wants to earn $600,000 in net (after-tax) income next year. Its product is priced at $400 per unit. Product costs include:

Direct materials	$120.00
Direct labor	$88.00
Variable overhead	$20.00
Total fixed factory overhead	$405,000

Variable selling expense is $16 per unit; fixed selling and administrative expense totals $255,000. Olivian has a tax rate of 40 percent

Required:

1. Calculate the before-tax profit needed to achieve an after-tax target of $600,000.
$

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 $   $   $   $

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4. What if Olivian had a 35 percent tax rate? Would the units sold to reach a $600,000 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

Contribution Margin per unit = Selling Price - Variable costs per unit
= $400-120-88-20-16 = $156 per unit

1. Before tax profit needed = $600000 / (1-0.40) = $1000000

2.
Sales units required = (Fixed costs + Deisred before tax profit) / Contribution margin per unit
= ($405000+255000+1000000)/156 = 10642 units or 10641 units

3.

Income Statement
	10642 units	10641 units
Sales Revenue	$     42,56,800	$      42,56,400
Less Variable Costs
Direct Material	$     12,77,040	$      12,76,920
Direct Labor	$        9,36,496	$        9,36,408
Variable Overhead	$        2,12,840	$        2,12,820
Variable Selling Expense	$        1,70,272	$        1,70,256
Total Variable Costs	$     25,96,648	$      25,96,404
Contribution Margin	$     16,60,152	$      16,59,996
Less Fixed Costs
Fixed Factory Overhead	$        4,05,000	$        4,05,000
Fixed selling and administrative expense	$        2,55,000	$        2,55,000
Total Fixed Costs	$        6,60,000	$        6,60,000
Operating Income	$     10,00,152	$        9,99,996
Income Tax Expense	$        4,00,061	$        3,99,998
Net Income	$        6,00,091	$        5,99,998

4.
Units will be lower, since lower expense for tax is to be reached.

Before tax profit needed = $600000 / (1-0.35) = $923077

2.
Sales units required = (Fixed costs + Deisred before tax profit) / Contribution margin per unit
= ($405000+255000+923077)/156 = 10148 units