I need help with this practice question! Please show me all the work for it! Gol
ID: 2394613 • Letter: I
Question
I need help with this practice question! Please show me all the work for it!
Gold Corporation performed a treasury analysis this year and determined that it had $150,000 to invest into a new project this year. After much consideration, Gold narrowed down options to 2 mutually exclusive projects, A and B. Information on Projects A and B are below:
Project A Project B
Initial investment $150,000 (fixed cost) $150,000 (fixed cost)
Units to sell 5,000 8,500
Sales price per unit $100 $150
Variable costs per unit $35 $70
Project A will result in tax free income, while Project B’s income will be taxed at 25%. Which project should Gold Corporation choose and why?
Explanation / Answer
Firstly we need to calculate the net income after tax from each project and then the project showing higher net income after tax should be choosed.
Calculation of net income after tax for both projects (Amounts in $)
As net income after tax of project B is more than project A, gold corporation should choose project B.
Particulars Project A Project B Sales (units to sell*Selling price) (5,000*$100) 500,000 (8,500*$150) 1,275,000 Less: Variable costs (Units*Variable cost per unit) (5,000*$35) (175,000) (8,500*$70) (595,000) Contribution 325,000 680,000 Less: Fixed costs (same) (150,000) (150,000) Net Income before tax 175,000 530,000 Less: Income tax expense 0 (132,500) (25%) Net Income after tax 175,000 397,500