Question Multiple Product Planning with Taxes (LO3, 4) In the year 2012, Wiggins

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Multiple Product Planning with Taxes (LO3, 4)

In the year 2012, Wiggins Processing Company had the following contribution income statement.

Sales   $1,000,000

Variable costs

Cost of goods sold      $420,000

Selling and administrative   $200,000        ($620,000)

Contributions margin                                   $380,000

Fixed Costs

Manufacturing overhead   $205,000

Selling and administrative $80,000             ($285,000)

Before tax profit                                             $95,000

Income Taxes (36%)                                    ($34,200)

After-Tax profit                                              $60,800

Determine the annual break-even point in sales dollars.

Determine the annual margin of safety in sales dollars.

What is the break-even point in sales dollars if management makes a decision that increases fixed costs by $57,000?

With the current cost structure, including fixed costs of $285,000, what dollar sales volume is required to provide an after-tax net income of $200,000?

Prepare an abbreviated contribution income statement to verify that the solution to requirement. (D) Will provide the desired after-tax income.

Explanation / Answer

Your answer

Determine the annual break-even point in sales dollars. Breakeven point is where sales = Fixed + Variable Costs Hence, in this case, breakeven point = $ 620,000 + $ 285,000 = $ 905,000 Determine the annual margin of safety in sales dollars. Since the current sales is $ 1,000,000, the margin of safety is $ 95,000 ($ 1,000,000 - $ 905,000) What is the break-even point in sales dollars if management makes a decision that increases fixed costs by $57,000? In case the fixed costs increase by $ 57,000, the breakeven point also goes up by $ 57,000, totaling $ 962,000. With the current cost structure, including fixed costs of $285,000, what dollar sales volume is required to provide an after-tax net income of $200,000? For the current volume of sales of $ 1,000,000, the after tax margin is $ 60,800 To obtain the variable costs of 62% and fixed costs of 285,000 $, the sale value will be worked out as under : Assuming the sales value as X X-62%X-285,000-((X-62%X-285000)*36%) = 200000 Therefore, 0.38X-285000-(0.38X*.36-102600) = 200000 Hence, X = 1572368 Prepare an abbreviated contribution income statement to verify that the solution to requirement. (D) Will provide the desired after-tax income.   

Your answer

$ Sales 1572368 Cost of Goods Sold 660394.7 Selling and Admin Costs 314473.7 Contribution Margin 597500 Fixed Costs as above 285000 Before Tax Profit 312500 Taxes @ 36% 112500 After Tax Income 200000

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