A Calgary ﬁrm currently has sales of $630,000 and costs of $553,636. The marginal tax rate is 34%. Under the percentage of sales approach, what is the projected net income if sales are expected to
Increase by 15%?

Question

Quizplus · Accepted Answer

1. Calculate the current net income:
Current net income = Sales - Costs - Taxes
Current net income = $630,000 - $553,636 - (34% x ($630,000 - $553,636))
Current net income = $630,000 - $553,636 - $20,556.64
Current net income = $55,807.36

2. Calculate the new sales amount:
New sales = Current sales x (1 + Growth rate)
New sales = $630,000 x (1 + 0.15)
New sales = $724,500

3. Calculate the new costs:
New costs = Current costs x (New sales / Current sales)
New costs = $553,636 x ($724,500 / $630,000)
New costs = $635,270.40

4. Calculate the new net income:
New net income = New sales - New costs - Taxes
New net income = $724,500 - $635,270.40 - (34% x ($724,500 - $635,270.40))
New net income = $57,961.22

Therefore, the projected net income with a 15% increase in sales using the percentage of sales approach is $57,961.

The best choice is C.

A Calgary ﬁRm Currently Has Sales of $630,000 and Costs