Tax

[aisha]

the break-even point in sales for Rice Company is $360000, and the company's contribution margin ratio is 20%. Its income tax rate is 40%. If Rice Company desires an after-tax profit of $84000, what would the total sales have to be?

PLZ HELP ME!!!!

A)1050360
B)1060000
C)780000
D)Cannot be determined w/o additional info

The answer me and my friend is getting is something like 106000 one zero is missing for some reason

[primarygun]

My answer is not the four above. Am I wrong? Not the one you mentioned either.

[aisha]

My answer is not the four above. Am I wrong? Not the one you mentioned either.


The correct answer is b but since it is a multiple choice question, we are not sure how to get the answer.

[aisha]

Can Someone Please Explain This Question If They Know How To Do It. Test Tomorrow!!!

[Astronuc]

Since this is finance/accounting, I may be missing something here.

The net profit after taxes is $84,000, which represents 0.6 or 60 % of the gross profit before taxes.

So the gross profit (GP) before taxes is $140,000 = $84,000/0.6. Now to get the gross profit, I believe that is just revenue from sales minus the costs.

Sales - Costs = GP

The variable costs VC are given by the relationship:

Contribution Margin Ratio = (Sales - VC)/Sales = 0.2
which means VC = 0.8 Sales

Now you need to find the Fixed Costs. So from the above formula,

GP = Sales - FC - VC.

At breakeven GP=0 (so no taxes). And the problem states that Sales at breakeven is $360,000, so

0 = $360,000 - FC - 0.8 ($360,000).

So FC = $72,000

Now FC is known, so returning to sales needed to get net profit after taxes of $84,000,

Sales (Income) - Fixed Costs - Variables Costs = $140,000

Sales - $72,000 - 0.8 Sales = $140,000, which simplifies to
0.8 Sales = $212,000 or

Sales = $212,000/0.8 = $1,060,000

[Astronuc]

Oops, noticed an error.

Sales - $72,000 - 0.8 Sales = $140,000, which simplifies to

0.2 Sales = $212,000 or

Sales = $212,000/0.2 = $1,060,000

Hopefully that was obvious.

[aisha]

Thanks for all your Help!!! :smile: