Question

The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting. CANTON CORPORATION Income Statement for 20X1 Sales $ 189,800 (14,600 units at $13.00) Cost of goods sold 116,800 (14,600 units at $8.00) Gross profit $ 73,000 Selling and administrative expense 9,490 Depreciation 14,000 Operating profit $ 49,510 Taxes (30%) 14,853 Aftertax income $ 34,657 a. Assume in 20X2 the same 14,600-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 $8.00 per unit. Also assume selling and administrative expense will be 5 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.)

Answer 1

Canton Corporation's aftertax income in 20X2, with a 10% increase in sales price and revised expenses, is calculated to be $47,279.

Step-by-step explanation:

To calculate the aftertax income for Canton Corporation in 20X2, we will first adjust the sales price upwards by 10% and then calculate the corresponding sales revenue. The cost of goods sold will remain at $8.00 per unit due to FIFO inventory policy. Next, we will determine the new selling and administrative expense as 5% of the new sales revenue and keep the depreciation unchanged. Finally, we will calculate the operating profit, apply the 30% tax rate, and arrive at the aftertax income.

Step-by-Step Calculation

1. New Sales Price = Old Sales Price x (1 + 10%) = $13.00 x 1.10 = $14.30 per unit.
2. New Sales Revenue = New Sales Price x Quantity Sold = $14.30 x 14,600 units = $208,780.
3. Cost of Goods Sold (COGS) remains the same at $8.00 per unit, so COGS = $8.00 x 14,600 units = $116,800.
4. Gross Profit = New Sales Revenue - COGS = $208,780 - $116,800 = $91,980.
5. Selling and Administrative Expense = New Sales Revenue x 5% = $208,780 x 0.05 = $10,439.
6. Depreciation remains unchanged at $14,000.
7. Operating Profit = Gross Profit - Selling and Administrative Expense - Depreciation = $91,980 - $10,439 - $14,000 = $67,541.
8. Taxes = Operating Profit x Tax Rate = $67,541 x 30% = $20,262.3.
9. Aftertax Income = Operating Profit - Taxes = $67,541 - $20,262.3 = $47,278.7.

Therefore, the aftertax income for 20X2, rounded to the nearest whole number, is $47,279.

Answer 2

Aftertax income 47,278.7

Step-by-step explanation:

Sales 14,600 units at $14.30 (10%Δ) 208,780

Cost of goods sold (unchanged) (116,800)

Gross profit 91,980

S&A expenses; 5% of sales

208,780 x 5% = (10,439)

Depreciation (unchanged) (14,000)

Operating profit 67,541

Taxes (30% of operating profit) 20,262.3

Aftertax income 47,278.7‬