The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting.
CANTON CORPORATION
Income Statement for 2013
Sales $340,100 (17,900 units at $19.00)
Cost of goods sold 205,850 (17,900 units at $11.50)
Gross profit $134,250
Selling and administrative expense 20,406
Depreciation 10,500
Operating profit $103,344
Taxes (30%) 31,003
Aftertax income $72,341
a. Assume in 2014 the same 17,900-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 $11.50 per unit. Also assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent.
a. Compute after-tax income for 2014. (Do not round intermediate calculations. Round your answer to the nearest whole number.)
b. In part a, by what percent did after-tax income increase as a result of a 10 percent increase in the sales price? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
c. Now assume that in 2015 the volume remains constant at 17,900 units, but the sales price decreases by 15 percent from its year 2014 level. Also, because of FIFO inventory policy, cost of goods sold reflects the inflationary conditions of the prior year and is $12.00 per unit. Further, assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the after-tax income. (Round the sales price per unit to 2 decimal places but do not round any other intermediate calculations. Round your final answer to the nearest whole dollar amount.)

Answer:

The Canton Corporation

a. The After-tax income for 2014 is:

= $94,719.

b. The after-tax income increased by 30.93% as a result of a 10% increase in the sale price.

c. The after-tax income for 2015 is:

= $51,530.

Explanation:

a) Data and Calculations:

CANTON CORPORATION

Income Statement for 2013

Sales                                               $340,100 (17,900 units at $19.00)

Cost of goods sold                         205,850 (17,900 units at $11.50)

Gross profit                                    $134,250

Selling and administrative expense 20,406

Depreciation                                       10,500

Operating profit                              $103,344

Taxes (30%)                                         31,003

After-tax income                               $72,341

CANTON CORPORATION

Income Statement for 2014

Sales                                                 $374,110 (17,900 units at $20.90)

Cost of goods sold                          205,850 (17,900 units at $11.50)

Gross profit                                     $168,260

Selling and administrative expense  22,446.60 (6% of sales)

Depreciation                                       10,500

Operating profit                              $135,313.40

Taxes (30%)                                       40,594.02

After-tax income                              $94,719.38

Increase in after-tax income:

After-tax income in 2014 =     $94,719

After-tax income in 2013 =     $72,341

Increase in after-tax income $22,378

Percentage increase = $22,378/$72,341 * 100 = 30.93%

Income Statement for 2015

Sales                                               $317,993.50 (17,900 units at $17.77)

Cost of goods sold                          214,800.00 (17,900 units at $12.00)

Gross profit                                    $103,193.50

Selling and administrative expense  19,079.61 (6% of sales)

Depreciation                                       10,500

Operating profit                               $73,613.89

Taxes (30%)                                       22,084.17

After-tax income                             $51,529.72

After-tax income rounded to the nearest whole dollar = $51,530

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