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Accounting multiple choice Tax

  1. Nov 23, 2004 #1
    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. jcsd
  3. Nov 23, 2004 #2
    My answer is not the four above. Am I wrong? Not the one you mentioned either.
     
  4. Nov 23, 2004 #3

    The correct answer is b but since it is a multiple choice question, we are not sure how to get the answer.
     
  5. Nov 24, 2004 #4
    Can Someone Please Explain This Question If They Know How To Do It. Test Tomorrow!!!
     
  6. Nov 24, 2004 #5

    Astronuc

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    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
  7. Nov 27, 2004 #6

    Astronuc

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    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.
     
  8. Nov 28, 2004 #7
    Thanks for all your Help!!! :smile:
     
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