Answer:
1. Before-tax profit = $700,000
2. Number of units that will yield the operating income = 15,889
3. Operating income = $700,010
4-a. The units sold to reach a $420,000 target net income would be lower than the units calculated in Requirement 2 and used in Requirement 3.
4.b. Number of units needed at the new tax rate = 15,291
Step-by-step explanation:
1. Calculate the before-tax profit needed to achieve an after-tax target of $420,000.
The before-tax profit can be calculated as follows:
After-tax target profit = Before-tax profit * (100% - Tax rate) ……………….. (1)
Substituting the relevant values into equation (1) and solve for Before-tax profit, we have:
$420,000 = Before-tax profit * (100% - 40%)
$420,000 = Before-tax profit * 60%
Before-tax profit = $420,000 / 60%
Before-tax profit = $700,000
2. Calculate the number of units that will yield operating income calculated in Requirement 1 above. (Round to the nearest unit.)
The number of units can calculated as follows:
Contribution margin = Selling price per unit - Direct materials per unit - Direct labor per unit - Variable overhead per unit - Variable selling expense per unit = $300 - $90 - $65 - $16 - $14 = $90
Before-tax profit = (Contribution margin * Number of units that will yield the operating income) - Total fixed factory overhead - Fixed selling and administrative expense ………………. (2)
Substituting the relevant values into equation (2) and solve for Number of units that will yield the operating income, we have:
$700,000 = ($90 * Number of units that will yield the operating income) - $440,000 - $290,000
$700,000 + $440,000 + $290,000 = $90 * Number of units that will yield the operating income
$1,430,000 = $90 * Number of units that will yield the operating income
Number of units that will yield the operating income = $1,430,000 / $90 = 15,889
3. Prepare an income statement for Olivian Company for the coming year based on the number of units computed in Requirement 2.
Olivian Company
Income statement
For the coming year
Details $ $
Sales revenue ($275 * 15,889) 4,369,475
Direct materials ($90 * 15,889) (1,430,010)
Direct labor cost per unit ($65 * 15,889) (1,032,785)
Variable overhead ($16 * 15,889) (254,224)
Total fixed factory overhead (440,000)
Cost of goods sold (3,157,019)
Gross profit 1,212,456
Selling and administrative expense:
Variable selling expense (14 * 15889) (222,446)
Fixed selling and administrative expense (290,000)
Total selling and administrative expense (512,446)
Operating income 700,010
4. What if Olivian had a 35 percent tax rate? Would the units sold to reach a $420,000 target net income be higher or lower than the units calculated in Requirement 3? Calculate the number of units needed at the new tax rate. (Round dollar amounts to the nearest dollar and unit amounts to the nearest unit.)
Before-tax profit = After-tax target profit / (100% - Tax rate) = $420,000 / (100% - 35%) = $646,154
Substituting the relevant values into equation (2) and solve for Number of units that will yield the operating income, we have:
$646,154 = ($90 * Number of units that will yield the operating income) - $440,000 - $290,000
$646,154 + $440,000 + $290,000 = $90 * Number of units that will yield the operating income
$1,376,154 = $90 * Number of units that will yield the operating income
Number of units that will yield the operating income = $1,376,154 / $90 = 15,291
4-a. The units sold to reach a $420,000 target net income would be lower than the units calculated in Requirement 2 and used in Requirement 3.
4.b. Number of units needed at the new tax rate = 15,291