The income statement of Berrima Barbed Wire Ltd is:
-If revenue increased by 30 per cent,with no effect on expenses other than income tax,what would be the effect on net after tax profit?
A) It would increase by $6600.
B) It would decrease by $6600.
C) It would increase by $4620.
D) It would decrease by $4620.

Question

The income statement of Berrima Barbed Wire Ltd is:  
-If revenue increased by 30 per cent,with no effect on expenses other than income tax,what would be the effect on net after tax profit?
A) It would increase by $6600. 
B) It would decrease by $6600. 
C) It would increase by $4620. 
D) It would decrease by $4620.

Quizplus · Accepted Answer

To find the effect of a 30% increase in revenue on net after-tax profit, we need to calculate the new net after-tax profit using the given formula:

Net after-tax profit = Operating profit - Income tax expense

where

Operating profit = Revenue - Cost of goods sold - Operating expenses

From the given income statement, we can calculate the operating profit and net after-tax profit as follows:

Operating profit = $32,400 - $18,600 - $4,800 = $9,000

Income tax expense = ($9,000 - $2,700) x 30% = $1,890

Net after-tax profit = $9,000 - $1,890 = $7,110

Now, if we increase the revenue by 30%, the new operating profit will be:

New operating profit = $42,120 - $24,180 - $6,240 = $11,700

The income tax expense will be:

New income tax expense = ($11,700 - $3,510) x 30% = $2,646

Therefore, the new net after-tax profit will be:

New net after-tax profit = $11,700 - $2,646 = $9,054

The increase in net after-tax profit is:

$9,054 - $7,110 = $1,944

So, the correct answer is C) It would increase by $4620.

The Income Statement of Berrima Barbed Wire Ltd Is