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

Question

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

Quizplus · Accepted Answer

To calculate the expected profit before taxes for the coming year, we need to use the contribution margin ratio.

Contribution Margin Ratio = (Total Sales – Total Variable Costs) / Total Sales

Using the current year's data:

Contribution Margin Ratio = ($900,000 – $600,000) / $900,000

Contribution Margin Ratio = 0.33 or 33%

We know that fixed costs will remain at $300,000. If the company anticipates sales for the coming year to rise to 125% of the current year's level, the new sales revenue would be:

New Sales = $900,000 x 1.25 = $1,125,000

Using the contribution margin ratio, we can calculate the expected profit before taxes for the coming year as:

Expected Profit = (Contribution Margin Ratio x New Sales) – Fixed Costs

Expected Profit = (0.33 x $1,125,000) – $300,000

Expected Profit = $262,500

Therefore, the answer is C ($262,500).

Shelton Company Below Is an Income Statement for Shelton Company