Question

Multiple Product Planning with Taxes
In the year 2008, Wiggins Processing Company had the following contribution income statement:

WIGGINS PROCESSING COMPANY Contribution Income Statement For the Year 2008
Sales		$1,000,000
Variable costs
Cost of goods sold	$460,000
Selling and administrative	200,000	(660,000)
Contribution margin		340,000
Fixed Costs
Factory overhead	192,000
Selling and administrative	80,000	(272,000)
Before-tax profit		68,000
Income taxes (38%)		(25,840)
After-tax profit		$42,160

HINT: Round the contribution margin ratio to two decimal places for your calculations below.

(a) Determine the annual break-even point in sales dollars.
$Answer

(b) Determine the annual margin of safety in sales dollars.
$Answer

(c) What is the break-even point in sales dollars if management makes a decision that increases fixed costs by $34,000?
Answer

(d) With the current cost structure, including fixed costs of $272,000, what dollar sales volume is required to provide an after-tax net income of $160,000?

Do not round until your final answer. Round your answer to the nearest dollar.
$Answer

(e) Prepare an abbreviated contribution income statement to verify that the solution to part (d) will provide the desired after-tax income.

Round your answers to the nearest dollar. Use rounded answers for subsequent calculations. Do not use negative signs with any of your answers.

WIGGINS PROCESSING COMPANY Income Statement For the Year 2008
Sales	$Answer
Variable costs	Answer
Contribution margin	Answer
Fixed costs	Answer
Net income before taxes	Answer
Income taxes (38%)	Answer
Net income after taxes	$Answer

Answer 1

Solution:
a.	Annual break-even point in sales dollars = $800,000
Working Notes:
	Annual break-even point in sales dollars=Fixed costs / Contribution margin ratio
	Contribution margin ratio = Contribution margin / Sales
	=340,000/1,000,000
	=0.34
	=34%
	Annual break-even point in sales dollars=Fixed costs / Contribution margin ratio
		=272,000 / 34%
		=$800,000
b.	Annual margin of safety in sales dollars = $200,000
Working Notes:
	Margin of safety = Current sales – break-even sales
	= $1,000,000 - $800,000
	= $200,000
c.	Break-even point in sales dollars = $900,000
Working Notes:
	Total new fixed cost = fixed costs + increases in fixed cost
	= 272,000 + 34,000
	= 306,000
	Contribution margin ratio = Contribution margin / Sales
	=340,000/1,000,000
	=0.34
	=34%
	Annual break-even point in sales dollars=Fixed costs / Contribution margin ratio
		=306,000 / 34%
		=$900,000
d.	Required Dollar sales volume = $1,559,013
Working Rates:
	Fixed cost = $272,000
	Income tax rate = 38%
	After-tax income = $160,000
	Contribution margin = 34%
	Desired Net income before tax= Desired profit after tax / (1 – tax rate)
		=160,000/(1-0.38)
		=$258,064.516129
	Required Dollar sales volume = (fixed costs + Desired net income before tax )/ Contribution margin
		=(272,000 + 258,064.516129)/34%
		=1,559,013.28273
		=$1,559,013
e.	WIGGINS PROCESSING COMPANY
	Income Statement
	For the Year 2008
	Sales	1,559,013
	Variable costs	1,028,949
	Contribution margin	530,064
	Fixed costs	272,000
	Net income before taxes	258,064
	Income taxes (38%)	98,064
	Net income after taxes	160,000
Working Notes:
	WIGGINS PROCESSING COMPANY
	Income Statement
	For the Year 2008
	Sales	1,559,013	a= is cal. In above d.
	Variable costs	1,028,949	b=a-c
	Contribution margin	530,064	c
	[1,559,013 x 34% ]
	Fixed costs	272,000	d
	Net income before taxes	258,064	e=c-d
	Income taxes (38%)	98,064	f=e*38%
	Net income after taxes	160,000	g=e-f
Please feel free to ask if anything about above solution in comment section of the question.