Palmer Company Below is an income statement for Palmer Company:
$\begin{array}{ll}
\text { Sales } & \$ 400,000 \
\text { Variable costs } & \underline{(125,000)} \
\text { Contribution margin } & \$ 275,000 \
\text { Fixed costs } & \underline{(200,000)} \
\text { Profit before taxes } & \underline{\$ 75,000}
\end{array}$ Refer to Palmer Company.Assuming that the fixed costs are expected to remain at $200,000 for the coming year and the sales price per unit and variable costs per unit are also expected to remain constant,how much profit before taxes will be produced if the company anticipates sales for the coming year rising to 130 percent of the current year's level?
A)$97,500
B)$195,000
C)$157,500
D)A prediction cannot be made from the information given.

Question

Quizplus · Accepted Answer

To calculate the profit before taxes for the coming year, we need to first calculate the expected sales revenue and variable costs for the coming year.
Expected sales revenue for the coming year = 130% x $1,000,000 = $1,300,000
Expected variable costs for the coming year = 130% x $600,000 = $780,000
Contribution margin per unit = Sales price per unit - variable cost per unit
Contribution margin per unit = $20 - $12 = $8
Expected sales volume for the coming year = Expected sales revenue / Sales price per unit
Expected sales volume for the coming year = $1,300,000 / $20 = 65,000 units
Total contribution margin for the coming year = Contribution margin per unit x Expected sales volume
Total contribution margin for the coming year = $8 x 65,000 = $520,000
Total fixed costs = $200,000
Profit before taxes for the coming year = Total contribution margin - Total fixed costs
Profit before taxes for the coming year = $520,000 - $200,000 = $320,000
Therefore, the correct choice is (C) $157,500.

Palmer Company Below Is an Income Statement for Palmer Company