In the year 2013, Wiggins Processing Company had the following contribution inco
ID: 2479055 • Letter: I
Question
In the year 2013, Wiggins Processing Company had the following contribution income statement: WIGGINS PROCESSING COMPANY Contribution Income Statement For the Year 2013 Sales $ 1,200,000 Variable costs Cost of goods sold $ 420,000 Selling and administrative 200,000 (620,000) Contribution margin 580,000 Fixed Costs Factory overheard 205,000 Selling and administrative 80,000 (285,000) Before-tax profit 295,000 Income taxes (36%) (106,200) After-tax profit $ 188,800 (a) Determine the annual break-even point in sales dollars. Round contribution margin ratio to two decimal places for your calculation. $Answer 593,750 Correct (b) Determine the annual margin of safety in sales dollars. Use rounded answer from above for calculation. $Answer 606,250 Correct (c) What is the break-even point in sales dollars if management makes a decision that increases fixed costs by $57,000? Use rounded contribution margin ratio (2 decimal places) for your calculation. $Answer 712,500 Correct (d) With the current cost structure, including fixed costs of $285,000, what dollar sales volume is required to provide an after-tax net income of $200,000? Use rounded contribution margin (2 decimal places) for calculation. Round your answer to the nearest dollar. $Answer 1,010,416 Incorrect (e) Prepare an abbreviated contribution income statement to verify that the solution to part (d) will provide the desired after-tax income. Round your answers to the nearest dollar. Use rounded answers for subsequent calculations. Do not use negative signs with any of your answers. WIGGINS PROCESSING COMPANY Income Statement For the Year 2013 Sales $Answer 1,200,000 Incorrect Variable costs (52% of sales) Answer 606,250 Incorrect Contribution margin Answer 597,500 Correct Fixed costs Answer 285,000 Correct Net income before taxes Answer 312,500 Correct Income taxes (36%) Answer 112,500 Correct Net income after taxes $Answer 200,000 Correct
Explanation / Answer
Solution:
Part a to c have already been solved and correct. So I assumed you only need part d and e to be calculated.
Part d
Desired after tax net income = $200,000
Hence, Desired Income before tax = Net Income after tax / (1 – Tax Rate)
= $200,000 / (1 – 0.36)
= $312,500
Contribution Margin = $580,000
Sale Value = $1,200,000
Contribution Margin = Contribution /Sales x 100 = 48.33%
Total Fixed Cost = $285,000
Desired Sales volume required to get before tax net income $312,500 = (Fixed Cost + Desired Income before tax) / Contribution Margin
= ($285,000 + $312,500) / 0.4833
= $1,236,292
In other words, the dollar sales volume is required to provide an after-tax net income of $200,000 = $1,236,292
Part e
Abbreviated contribution income statement
Desired Sales
$1,236,292
Variable Cost (51.67% of Sales)
$638,792
Contribution Margin (48.33% of Sales)
$597,500
Total Fixed Cost
$285,000
Before Tax Profit
$312,500
Income Taxes (36%)
$112,500
After Tax Profit (Desired Net Income)
$200,000
Abbreviated contribution income statement
Desired Sales
$1,236,292
Variable Cost (51.67% of Sales)
$638,792
Contribution Margin (48.33% of Sales)
$597,500
Total Fixed Cost
$285,000
Before Tax Profit
$312,500
Income Taxes (36%)
$112,500
After Tax Profit (Desired Net Income)
$200,000