91Ó°ÊÓ

The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting.

CANTON CORPORATION
Income Statement for 20X1
Sales	\(272,800 (17,600 units at \)15.50)
Cost of goods sold	123,200 (17,600 units at \(7)
Gross profit	\)149,600
Selling and administrative expenses	13,640
Depreciation	15,900
Operating profits	\(120,060
Taxes (30%)	36,018
After tax income	\)84,042

c. Now assume that in 20X3 the volume remains constant at 17,600 units, but the sales price decreases by 15 percent from its year 20X2 level. Also, because of FIFO inventory policy, cost of goods sold reflects the inflationary conditions of the prior year and is $7.50 per unit. Further, assume selling and administrative expense will be 5 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the aftertax income.

Step by step solution

01

After-tax income

After tax income is computed by a company by deducting the total expense (direct or indirect) of the company from the gross revenue earned by the company.

02

Calculation of after tax income

CANTON CORPORATION
Income Statement for 20X3
Sales (17,600 x $15.50 x 85%)	$231,880
Cost of goods sold (17,600 x $7.50)	132,000
Gross profit	$99,880
Selling and administrative expenses (5% of sales)	11,594
Depreciation	15,900
Operating profits	$72,386
Taxes (30%)	21,716
After tax income	$50,670

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