Question

The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting CANTON CORPORATION Income Statement for 20X1 $141,600 (11,800 units at $12.00) 82,600 (11,800 units at $7.00) Sales Cost of goods sold Gross profit Selling and administrative expense Depreciation Operating profit Taxes (30%) Aftertax income S 59,000 8,496 12,300 $ 38,204 14 461 $ 26,743 a. Assume in 20X2 the same 11,800-unit volume is maintained, but that the sales price increases by 10 percent. Because of FIFO inventory policy, old inventory will still be charged off at $7.00 per unit. Also assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute aftertax income for 20X2. (Do not round intermediate calculations. Round your answer to the nearest whole number.) Aftertax ncome b. In part a, by what percent did aftertax income increase as a result of a 10 percent increase in the sales price? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Gain in aftertax income c. Now assume that in 20X3 the volume remains constant at 11,800 units, but the sales price decreases by 15 percent from its year 20X2 level. Also because of FIFO inventory policy, cost of goods sold reflects the inflationary conditions of the prior year and is $7.50 per unit. Further, assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the aftertax income (Round the sales price per unit to 2 decimal places but do not round any other intermediate calculations. Round your final answer to the nearest whole dollar amount.) Aftertax income

Answer 1

Step 1

(a)

Assuming that inventory was sufficient for sale of 11,800 units during 20X2, thus cost of goods sold would be same as during 20X1. Hence After Tax Income would be as under

Sales    $ 155,760 (11,800 units at $13.20 per unit)

Cost of goods sold $ 82,600 ( 11,800 units at $ 7.0 per unit)

Gross profit $    73,160

Selling and Administrative expenses    $    9,345.6 ( 6% of sales)

Depreciation    $    12,300

Operation profit $    51,514,4

Taxes (30%)    $ 15,454.32

After Tax Income $ 36060.08 rounded to $ 36,060

Thus After Tax Income would be    $36,060

Step 2

(b)

Total gain in the After Tax Income was as under

After Tax Income during 20X2 $ 15,454.32

After Tax Income during 20X1 $ 11,461

Gain in After Tax Income $ 3,993.32

Gain in after tax income (%)    34.84%

Step 3

(c)

Income statement for the year 20X3 would be as under

Sales $ 132,396 (11800 units at $ 11.22 per unit)

Cost of Goods sold    $    88,500 ( 11800 units at $ 7.50 per unit)

Gross profit    $ 43,896

Selling and administrative expenses    $    7,943.76 (at 6% of Sales)

Depreciation $    12,300

Operating Profit    $ 23,652.24

Taxes (30%) $    7,095.672

After Tax Income    $ 16,556.568

Rounded to    $ 16,557