# 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