Question

Problems P16-28. Profit Planning with Taxes Carron Net Company manufactures sports nets for virtually every outdoor sport. Assume Carron sells nets for $50, on average, per unit. Last year, the company manufactured and sold 30,000 nets to obtain an after-tax profit of $275,000. Variable and fixed costs follow. LO3 Carron Net Company Variable Costs per Unit Manufacturing. Selling and administrative Total Fixed Costs per Year $20 Manufacturing.. 4 Selling and administrative. $24 Total $232,250 204,000 $436,250 Required a. Determine the tax rate the company paid last year. b. What unit sales volume is required to provide an after-tax profit of $400,000? c. If the company reduces the unit variable cost by $4 and increases fixed manufacturing costs by $53,000, what unit sales volume is required to provide an after-tax profit of $400,000? d. What assumptions are made about taxable income and tax rates in requirements (a) through (c)? P16-29. Contribution Income Statement, Cost-Volume-Profit Graph, and Taxes Jail and Sail: Alcatraz Tour and Cruise provides sunset sightseeing tours of Alcatraz and the San Francisco Bay. Tickets cost $140 each. Assume 2,200 customers were served in July. LO2, 3 Jail and Sail: Alcatraz Tour and Cruise

Answer 1

Ans:

(a) Tax Rate

Sr. No	Particulars	Amount ($)
1	Sales ($50 * 30000 units)	$1500000
2	Less: Variable Manufacturing cost ($20 * 30000 units)	($600000)
3	Less: Variable Selling and administrative cost ($4 * 30000 units)	($120000)
4	Contribution Margin	$780000
5	Less: Fixed Manufacturing costs	($232250)
6	Less: Fixed Selling and administrative cost	($204000)
7	Profit before tax	$343750
8	Profit after tax (given)	$275000
9	Tax amount (8-9)	$68750
10	Tax Rate (9/7) *100 i.e $68750 / $343750	20%

(b) Unit sales volume to provide an after tax profit of $400000

Sr. No	Particulars	Amount ($)
1	Target Profit required before tax ($400000/80) * 100	$500000
2	Add: Fixed Manufacturing costs	$232250
3	Add: Fixed Selling and administrative cost	$204000
4	Total (1+2+3)	$936250
5	Contribution Margin per unit ($780000 / 30000 units)	$26
6	Unit Sales required to cover fixed costs and profit (4/5)	36009.60 or 36010 Units

(c) Variable cost reduced by $4 and fixed manufacturing cost increases by $53000, sales volume required to achieve profit of $400000 after tax.

Sr. No	Particulars	Amount ($)
1	Target Profit required before tax ($400000/80) * 100	$500000
2	Add: Fixed Manufacturing costs ($232250+$53000)	$285250
3	Add: Fixed Selling and administrative cost	$204000
4	Total (1+2+3)	$989250
5	New Contribution Margin per unit [$780000 + (30000 units * $4)] / 30000 units)	$30
6	Unit Sales required to cover fixed costs and profit (4/5)	32975 Units

(d) Assumptions made about taxable income and tax rates in requirements (a) through (c):

Tax rate will be 20% and the tax effect on the increaseed fixed cost and decreased variable cost has been ignored.