Question

Cornerstone Exercise 16.4 (Algorithmic)
After-Tax Profit Targets

Olivian Company wants to earn $360,000 in net (after-tax) income next year. Its product is priced at $400 per unit. Product costs include:

Direct materials	$120.00
Direct labor	$88.00
Variable overhead	$20.00
Total fixed factory overhead	$440,000

Variable selling expense is $16 per unit; fixed selling and administrative expense totals $290,000. 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. Olivian Company Income Statement For the Coming Year Total $   $   $   $

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?
- Select your answer -HigherLowerCorrect 1 of Item 3

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

Answer 1

Req.1
Before tax profit needed : $ 360,000 / (1-0.40)	$    600,000
Req.2
Target sales in units: Desired contribution / Contribution margin per unit
Desired Contribution (440000+290000+600000)	$ 1,330,000
Contribution per unit (400-(120+88+20+16))	$            156
Target sales in units	8,526
Req.3
Olivian Company
Income Statement
For the Coming Year
Sales revenue (8526*400)	$ 3,410,400
Variable Costs:
Direct Material (120*8526)	$ 1,023,120
Direct Labor (88*8526)	$    750,288
Variable Overhead (20*8526)	$    170,520
Variable Selling Overhead (16*8526)	$    136,416
Contribution	$ 1,330,056
Fixed factory overhead	$    440,000
Fixed selling and administrative expense	$    290,000
Net Income	$    600,056
Tax @ 40%	$    240,022
Net income after tax	$    360,034
Req.4
Before tax profit needed : $ 360,000 / (1-0.35)	$    553,846
Target sales in units: Desired contribution / Contribution margin per unit
Desired Contribution (440000+290000+553846)	$ 1,283,846
Contribution per unit (400-(120+88+20+16))	$            156
Target sales in units	8,230
The units sold to reach a $360,000 target net income is 296 units lower than the units calculated in Requirement 2.