Question

Blanchard Company manufactures a single product that sells for $180 per unit and whose total variable costs are $135 per unit. The company’s annual fixed costs are $562,500. The sales manager predicts that annual sales of the company’s product will soon reach 40,000 units and its price will increase to $200 per unit. According to the production manager, variable costs are expected to increase to $140 per unit but fixed costs will remain at $562,500. The income tax rate is 20%. What amounts of pretax and after-tax income can the company expect to earn from these predicted changes?

Answer 1

Answer:

(A) Pre-tax Income           1,837,500

(B) After-tax Income        1,470,000

Explanation:

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

200 - 140= 60 CM

We use the expected values, because we are asked for that escenario.

Next we multiply the contribution per unit by the total unit sold

$Contribution \: per \: unit \times units \: sold = Total \: Contribution \: Margin$

60 x 40,000 units = 2,400,000 Total Contribution

Fixed Cost                  (562,500)

Pre-tax Income           1,837,500

Tax income 20%         (367,500)

After-tax Income        1,470,000