Question

After-Tax Profit

Targets Olivian Company wants to earn $300,000 in net (after-tax) income next year. Its product is priced at $250 per unit.

Product costs include:

Direct materials $75.00

Direct labor $55.00

Variable overhead $12.50

Total fixed factory overhead $445,000

Variable selling expense is $10 per unit; fixed selling and administrative expense totals $295,000. Olivian has a tax rate of 40 percent.

Required: 1. Calculate the before-tax profit needed to achieve an after-tax target of $300,000. $

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 $300,000 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

Answer 1.

Net Income = $300,000

Net Income = Before-tax Profit * (1 - tax)
$300,000 = Before-tax Profit * (1 - 0.40)
Before-tax Profit = $500,000

Answer 2.

Selling Price per unit = $250

Variable Cost per unit = Direct Materials + Direct Labor + Variable Overhead + Variable Selling Expense
Variable Cost per unit = $75 + $55 + $12.50 + $10
Variable Cost per unit = $152.50

Fixed Costs = Fixed Factory Overhead + Fixed Selling and Administrative Expenses
Fixed Costs = $445,000 + $295,000
Fixed Costs = $740,000

Contribution Margin per unit = Selling Price per unit - Variable Cost per unit
Contribution Margin per unit = $250 - $152.50
Contribution Margin per unit = $97.50

Required sales in units = (Fixed Costs + Before-tax Profit) / Contribution Margin per unit
Required sales in units = ($740,000 + $500,000) / $97.50
Required sales in units = 12,718

Answer 3.

Answer 4.

Net Income = $300,000

Net Income = Before-tax Profit * (1 - tax)
$300,000 = Before-tax Profit * (1 - 0.35)
Before-tax Profit = $461,538.46

Required sales in units = (Fixed Costs + Before-tax Profit) / Contribution Margin per unit
Required sales in units = ($740,000 + $461,538.46) / $97.50
Required sales in units = 12,323

Units sold to reach targeted net income is lower than the units calculated in Requirement 2