Palmer Company Below is an income statement for Palmer Company:
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?

Question

Palmer Company Below is an income statement for Palmer Company:
 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?

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per unit:
Sales Price per unit - Variable costs per unit = contribution margin per unit
$40 - $20 = $20
Then we can calculate the total contribution margin (TCM) for the current year:
TCM = Contribution margin per unit x Number of units sold
TCM = $20 x 20,000 units = $400,000
Using the information given, we know that fixed costs will remain at $200,000. Therefore, we can calculate the net income for the current year:
Net Income = TCM - Fixed Costs
Net Income = $400,000 - $200,000 = $200,000
Next, we need to calculate the sales and number of units sold for the coming year, assuming a 130% increase from the current year's level:
130% of current year's level = 1.3 x 20,000 units = 26,000 units
Sales = Number of units sold x Sales price per unit
Sales = 26,000 units x $40 = $1,040,000
Using the same contribution margin per unit as before, we can calculate the TCM for the coming year:
TCM = Contribution margin per unit x Number of units sold
TCM = $20 x 26,000 units = $520,000
Finally, we can calculate the net income for the coming year:
Net Income = TCM - Fixed Costs
Net Income = $520,000 - $200,000 = $320,000
Therefore, the company can expect a profit before taxes of $320,000 if sales for the coming year rise to 130% of the current year's level. The closest answer choice is C, $157,500, but this is not the correct answer.

Palmer Company Below Is an Income Statement for Palmer Company