Question

A partially complete manufacturing cost summary is presented below. The required missing information below is indicated with “_______.” The after-tax rate of return is to be 20%. Please provide the missing information using suggestions from your text. Don’t forget to include your assumptions, calculations and/or logic. Please assume the income tax rate to be 35%.

          Fixed Capital                             $500,000.

          Working Capital                        ________

          Direct Costs                                         $1,500,000.

          Indirect Costs                             $200,000.

          General Expenses                     $120,000.

          Total Manufacturing Expenses _________

          Depreciation                    _________

          Total Expenses                          _________

          Revenue from Sales                            _________

          Net Annual Profit                      _________

          Income Taxes                            _________

          Net Profit after Taxes                 _________

          After-Tax Return on Investment = 20%.

Answer 1

• All working forms part of the answer
• Working #1

Working			Explanations/Suggestion/Assumptions
A	Fixed Capital	$         500,000.00	Given in question
B	Working Capital	$         800,000.00	Assumed figure, as asked
C = A+B	Total Investments	$     1,300,000.00	Working capital + Fixed Capital = Investments
D	After Tax Return on Investments	20%	Given in question
E = C x D	Net Profit after taxes	$         260,000.00	After tax profit would be 20% of investment
F	Tax Rate	35%	Given in question
G = E/(100% - 65%)	Net Annual Profit (before taxes)	$         400,000.00	After tax profit would be = 65% of before tax profits.
H = G x 35% or G - E	Income taxes	$         140,000.00	Calculation shown

• Completion of missing figures, based on above concepts

Working			Explanations/Suggestion/Assumptions
A	Fixed Capital	$      500,000.00	Given in question
B	Working Capital	$      800,000.00	See Working #1
C	Direct Costs	$ 1,500,000.00	Given in question
D	Indirect Costs	$      200,000.00	Given in question
E	General Expenses	$      120,000.00	Given in question
F = C+D+E	Total Manufacturing Expenses	$ 1,820,000.00	Total of costs
G	Depreciation	$        50,000.00	Assumed to 10% of the fixed capital
H = F+G	Total Expenses	$ 1,870,000.00	Calculated value
I = J + H	Revenue from Sales	$ 2,270,000.00	Revenues = Total expense + Annual profits
J	Net Annual Profits	$      400,000.00	See Working #1
K	Income Taxes	$      140,000.00	See Working #1 or 400000 x 35%
L = J - K	Net Profit After Taxes	$      260,000.00	See Working #1