Parker Company
Below is an income statement for Parker Company:
Sales $ \$ 400,000 $
Variable costs $\underline{(125,000)}$
Contribution margin $275,000
Fixed costs $\underline{(200,000)}$
Profit before taxes $\underline{\$75,000}$

Refer to Parker 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?
A)$97,500
B)$195,000
C)$157,500
D)A prediction cannot be made from the information given.

Question

Parker Company
Below is an income statement for Parker Company:
Sales                                                                          $ \$ 400,000 $
Variable costs                                                          $\underline{(125,000)}$
Contribution margin                                                  $275,000
Fixed costs                                                            $\underline{(200,000)}$
Profit before taxes                                                  $\underline{\$75,000}$

Refer to Parker 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?
A)$97,500
B)$195,000
C)$157,500
D)A prediction cannot be made from the information given.

Quizplus · Accepted Answer

First, find the current contribution margin per unit: 
Contribution margin = Sales - Variable costs 
$275,000 = $400,000 - $125,000 
Contribution margin per unit = $275,000/2000 units = $137.50 
Next, calculate the expected sales for the coming year: 
Expected sales = 130% x $400,000 = $520,000 
Then, calculate the expected contribution margin: 
Expected contribution margin = Expected sales x Contribution margin per unit 
Expected contribution margin = $520,000 x $137.50 = $71,500 
Finally, calculate the expected profit before taxes: 
Expected profit before taxes = Expected contribution margin - Fixed costs 
Expected profit before taxes = $71,500 - $200,000 = $157,500 
Therefore, the answer is C.

Parker Company Below Is an Income Statement for Parker Company $400,000 \$ 400,000 $400,000

Parker Company
Below Is an Income Statement for Parker Company $\$ 400,000$