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	$400,000
Selling and administrative	200,000	(600,000)
Contribution margin		400,000
Fixed Costs
Factory overhead	180,000
Selling and administrative	80,000	(260,000)
Before-tax profit		140,000
Income taxes (40%)		(56,000)
After-tax profit		$84,000

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 $60,000?
Answer

(d) With the current cost structure, including fixed costs of $260,000, what dollar sales volume is required to provide an after-tax net income of $190,000?

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 (40%)	Answer
Net income after taxes	Answer

Answer 1

Answer a.

Contribution margin ratio = Contribution margin / Sales
Contribution margin ratio = $400,000 / $1,000,000
Contribution margin ratio = 0.40

Breakeven point in sales dollars = Fixed costs / Contribution margin ratio
Breakeven point in sales dollars = $260,000 / 0.40
Breakeven point in sales dollars = $650,000

Answer b.

Margin of safety = Sales - Breakeven point in sales dollars
Margin of safety = $1,000,000 - $650,000
Margin of safety = $350,000

Answer c.

Fixed costs = $260,000 + $60,000
Fixed costs = $320,000

Breakeven point in sales dollars = Fixed costs / Contribution margin ratio
Breakeven point in sales dollars = $320,000 / 0.40
Breakeven point in sales dollars = $800,000

Answer d.

After-tax net income = Before-tax taxable income * (1 - Tax rate)
$190,000 = Before-tax taxable income * (1 - 0.40)
Before-tax taxable income = $316,666.667

Required sales = (Fixed costs + Before-tax taxable income) / Contribution margin ratio
Required sales = ($260,000 + $316,666.667) / 0.40
Required sales = $1,441,667

Answer e.