Multiple Product Planning with Taxes In the year 2008 Wiggin

Multiple Product Planning with Taxes
In the year 2008, Wiggins Processing Company had the following contribution income statement:

HINT: Round the contribution margin ratio to two decimal places for your calculations below.

(a) Determine the annual break-even point in sales dollars.
$Answer

(b) Determine the annual margin of safety in sales dollars.
$Answer

(c) What is the break-even point in sales dollars if management makes a decision that increases fixed costs by $34,000?
Answer

(d) With the current cost structure, including fixed costs of $272,000, what dollar sales volume is required to provide an after-tax net income of $160,000?

Do not round until your final answer. Round your answer to the nearest dollar.
$Answer

(e) Prepare an abbreviated contribution income statement to verify that the solution to part (d) will provide the desired after-tax income.

Round your answers to the nearest dollar. Use rounded answers for subsequent calculations. Do not use negative signs with any of your answers.

WIGGINS PROCESSING COMPANY Contribution Income Statement For the Year 2008
Sales		$1,000,000
Variable costs
Cost of goods sold	$460,000
Selling and administrative	200,000	(660,000)
Contribution margin		340,000
Fixed Costs
Factory overhead	192,000
Selling and administrative	80,000	(272,000)
Before-tax profit		68,000
Income taxes (38%)		(25,840)
After-tax profit		$42,160

Solution

Solution: a. Annual break-even point in sales dollars = $800,000 Working Notes: Annual break-even point in sales dollars=Fixed costs / Contribution margin ratio Contribution margin ratio = Contribution margin / Sales =340,000/1,000,000 =0.34 =34% Annual break-even point in sales dollars=Fixed costs / Contribution margin ratio =272,000 / 34% =$800,000 b. Annual margin of safety in sales dollars = $200,000 Working Notes: Margin of safety = Current sales – break-even sales = $1,000,000 - $800,000 = $200,000 c. Break-even point in sales dollars = $900,000 Working Notes: Total new fixed cost = fixed costs + increases in fixed cost = 272,000 + 34,000 = 306,000 Contribution margin ratio = Contribution margin / Sales =340,000/1,000,000 =0.34 =34% Annual break-even point in sales dollars=Fixed costs / Contribution margin ratio =306,000 / 34% =$900,000 d. Required Dollar sales volume = $1,559,013 Working Rates: Fixed cost = $272,000 Income tax rate = 38% After-tax income = $160,000 Contribution margin = 34% Desired Net income before tax= Desired profit after tax / (1 – tax rate) =160,000/(1-0.38) =$258,064.516129 Required Dollar sales volume = (fixed costs + Desired net income before tax )/ Contribution margin =(272,000 + 258,064.516129)/34% =1,559,013.28273 =$1,559,013 e. WIGGINS PROCESSING COMPANY Income Statement For the Year 2008 Sales 1,559,013 Variable costs 1,028,949 Contribution margin 530,064 Fixed costs 272,000 Net income before taxes 258,064 Income taxes (38%) 98,064 Net income after taxes 160,000 Working Notes: WIGGINS PROCESSING COMPANY Income Statement For the Year 2008 Sales                         1,559,013 a= is cal. In above d. Variable costs                         1,028,949 b=a-c Contribution margin                            530,064 c [1,559,013 x 34% ] Fixed costs                            272,000 d Net income before taxes                            258,064 e=c-d Income taxes (38%)                               98,064 f=e*38% Net income after taxes                            160,000 g=e-f Please feel free to ask if anything about above solution in comment section of the question.