Question

The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting. CANTON CORPORATION Income Statement for 20X1 Sales $ 272,800 (17,600 units at $15.50) Cost of goods sold 123,200 (17,600 units at $7.00) Gross profit $ 149,600 Selling and administrative expense 13,640 Depreciation 15,900 Operating profit $ 120,060 Taxes (30%) 36,018 Aftertax income $ 84,042 Assume in 20X2 the same 17,600-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 $7 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. Note: Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount. In part a, by what percent did aftertax income increase as a result of a 10 percent increase in the sales price?

Answer 1

The aftertax income for Canton Corporation in 20X2 is $102,316, which is a 21.74% increase from the 20X1 aftertax income of $84,042.

Step-by-step explanation:

To compute the aftertax income for 20X2, first calculate the new sales revenue. The sales price increases by 10 percent, which means the new sales price is $15.50 x 1.10 = $17.05 per unit. The total sales revenue for 20X2 is 17,600 units x $17.05 = $300,280.

As given, cost of goods sold remains the same at $7.00 per unit, so it will be 17,600 units x $7.00 = $123,200. The gross profit for 20X2 is sales minus cost of goods sold, which is $300,280 - $123,200 = $177,080.

The selling and administrative expense is 5 percent of sales, so for 20X2 it is $300,280 x 0.05 = $15,014. Depreciation remains unchanged at $15,900.

Subtract the selling and administrative expenses and depreciation from the gross profit to find the operating profit: $177,080 - $15,014 - $15,900 = $146,166.

Applying the 30 percent tax rate, taxes for 20X2 are: $146,166 x 0.30 = $43,850 (rounded to the nearest dollar as instructed). The aftertax income is then the operating profit minus taxes: $146,166 - $43,850 = $102,316.

To find the percent increase in aftertax income from 20X1 to 20X2, we will compare the aftertax income of $84,042 in 20X1 to 20X2’s aftertax income of $102,316. The increase in dollars is $102,316 - $84,042 = $18,274. The percent increase in aftertax income is ($18,274 / $84,042) x 100 = 21.74%, rounded to two decimal places.