Question

After-Tax Profit Targets

Olivian Company wants to earn $360,000 in net (after-tax) income next year. Its product is priced at $350 per unit. Product costs include:

Direct materials	$105.00
Direct labor	$77.00
Variable overhead	$17.50
Total fixed factory overhead	$410,000

Variable selling expense is $14 per unit; fixed selling and administrative expense totals $260,000. Olivian has a tax rate of 40 percent.

Required:

1. Calculate the before-tax profit needed to achieve an after-tax target of $360,000.
$

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
	$
	$
	$
	$

4. What if Olivian had a 35 percent tax rate? Would the units sold to reach a $360,000 target net income be higher or lower than the units calculated in Requirement 2?

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

Req 1:
Total Variable Cost: 105+77+17.50+14= 213.50 per unit
Selling price: 350 per unit
Contribution per unit: 350 - 213.50 = 136.50 per unit
Before tax profit needed : $ 360,000 / (1-0.40) = $ 600,000
Req 2:
Total Fixed Cost: 410,000 +260,000 = $ 670,000
Desired Contribution = 670000+600000 =1270,000
Taget sales in units: Desired contribution / Contribution margin per unit
		$ 1270,000 / 136.50 = 9304 units
Req 3:
CONTRIBUTION MARGIN ICNOME STATEMENT:
Sales revenue (9304 units @ 350)				3,256,400
Less: Variable cost:
Material (9304 units @ 105)				976,920
Labour (9304 units @ 77)				716408
OH (9304*17.50)				162820
Selling expense (9304*14)				130256
Contribution				1,269,996
Less: Fixed cost
Fixed manufacturing cost				410000
Fixed selling cost				260000
Net income				599,996
Less: Tax @40%				239998.4
Net income after tax				359,998
Req 4:
Lower units sales will be required for net Income.
Before tax income: $ 360000 / (1-0.35) = $ 553,846
Target salesin units: Desired contribution/ CM per unit
		(670000+553846) / 136.50 = 8966 units