Accounting multiple choice Tax

1. Nov 23, 2004

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

Last edited by a moderator: Jul 15, 2014
2. Nov 23, 2004

primarygun

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

3. Nov 23, 2004

aisha

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

4. Nov 24, 2004

aisha

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

5. Nov 24, 2004

Staff: Mentor

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

Last edited: Nov 24, 2004
6. Nov 27, 2004

Staff: Mentor

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.

7. Nov 28, 2004

aisha

Thanks for all your Help!!!