What Are Rice Company's Total Sales for Desired After-Tax Profit?

AI Thread Summary
Rice Company's break-even sales are $360,000 with a contribution margin ratio of 20% and an income tax rate of 40%. To achieve an after-tax profit of $84,000, the required total sales amount to $1,060,000. This calculation involves determining the gross profit before taxes, which is $140,000, and factoring in fixed costs of $72,000. The relationship between sales, variable costs, and fixed costs leads to the final sales figure. The discussion clarifies the calculations needed to arrive at the correct answer.
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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
 
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My answer is not the four above. Am I wrong? Not the one you mentioned either.
 
primarygun said:
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.
 
Can Someone Please Explain This Question If They Know How To Do It. Test Tomorrow!
 
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
 
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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.
 
Thanks for all your Help! :smile:
 

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