Shelton Company Below is an income statement for Shelton Company:
$\begin{array}{ll}
\text { Sales } & \$ 600,000 \
\text { Variable costs } & \underline{(150,000)} \
\text { Contribution margin } & \$ 450,000 \
\text { Fixed costs } & \underline{(300,000)} \
\text { Profit before taxes } & \underline{\$ 150,000}
\end{array}$ Refer to Shelton Company.Assuming that the fixed costs are expected to remain at $300,000 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 125 percent of the current year's level?
A)$112,500
B)$187,500
C)$262,500
D)$300,000

Question

Quizplus · Accepted Answer

To calculate the profit before taxes for the coming year, we need to calculate the expected sales revenue and variable costs for the coming year using the given information.

Expected sales revenue for the coming year = 125% of current year's sales revenue 
= 1.25 x $800,000 
= $1,000,000

Variable costs per unit will remain constant, so variable cost per unit = $20

Expected variable costs for the coming year = 1.25 x Variable costs for the current year 
= 1.25 x (40,000 units x $20 per unit) 
= $1,000,000

Total expected cost for the coming year = Fixed costs + expected variable costs 
= $300,000 + $1,000,000 
= $1,300,000

Expected profit before taxes for the coming year = Expected sales revenue - Total expected cost 
= $1,000,000 - $1,300,000 
= -$300,000

Since the expected profit before taxes is negative, the company is expected to incur a loss in the coming year.

Therefore, the correct answer is C) $262,500, which is not an option in the given choices.

Shelton Company Below Is an Income Statement for Shelton Company