After-Tax Profit Targets Olivian Company wants to earn $360,000 in net (after-ta

Question

After-Tax Profit Targets

Olivian Company wants to earn $360,000 in net (after-tax) income next year. Its product is priced at $350 per unit. Product costs include:

Variable selling expense is $14 per unit; fixed selling and administrative expense totals $260,000. Olivian has a tax rate of 40 percent.

Required:

1. Calculate the before-tax profit needed to achieve an after-tax target of $360,000.
$

2. Calculate the number of units that will yield operating income calculated in Requirement 1 above. If required, round your answer to the nearest whole unit.
units

3. Prepare an income statement for Olivian Company for the coming year based on the number of units computed in Requirement 2. Do NOT round interim calculations and, if required, round your answer to the nearest dollar.

4. What if Olivian had a 35 percent tax rate? Would the units sold to reach a $360,000 target net income be higher or lower than the units calculated in Requirement 2?

Calculate the number of units needed at the new tax rate. In your calculations, round before-tax income to the nearest dollar. Round your answer to the nearest whole unit.
units

Direct materials $105.00 Direct labor $77.00 Variable overhead $17.50 Total fixed factory overhead $410,000

Explanation / Answer

Req 1: Total Variable Cost: 105+77+17.50+14= 213.50 per unit Selling price: 350 per unit Contribution per unit: 350 - 213.50 = 136.50 per unit Before tax profit needed : $ 360,000 / (1-0.40) = $ 600,000 Req 2: Total Fixed Cost: 410,000 +260,000 = $ 670,000 Desired Contribution = 670000+600000 =1270,000 Taget sales in units: Desired contribution / Contribution margin per unit $ 1270,000 / 136.50 = 9304 units Req 3: CONTRIBUTION MARGIN ICNOME STATEMENT: Sales revenue (9304 units @ 350) 3,256,400 Less: Variable cost: Material (9304 units @ 105) 976,920 Labour (9304 units @ 77) 716408 OH (9304*17.50) 162820 Selling expense (9304*14) 130256 Contribution   1,269,996 Less: Fixed cost Fixed manufacturing cost 410000 Fixed selling cost 260000 Net income 599,996 Less: Tax @40% 239998.4 Net income after tax 359,998 Req 4: Lower units sales will be required for net Income. Before tax income: $ 360000 / (1-0.35) = $ 553,846 Target salesin units: Desired contribution/ CM per unit (670000+553846) / 136.50 = 8966 units

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