Question

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

CANTON CORPORATION
Income Statement for 2013
Sales $272,800 (17,600 units at $15.50)
Cost of goods sold 123,200 (17,600 units at $7.00)
Gross profit 149,600
Selling and administrative expense 13,640
Depreciation 15,900
Operating profit 120,060
Taxes (30%) 36,018
Aftertax income $ 84,042


a. Assume in 2014 that the same 17,600-unit volume is maintained, but that the sales price increases by 10 percent. Because of FIFO inventory policy, old inventory will still be charged off at $7 per unit. Also assume selling and administrative expense will be 5 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute aftertax income for 2014.
b. In part a, by what percent did aftertax income increase as a result of a 10 percent increase in the sales price? Explain why this impact took place.
c. Now assume that in 2015 the volume remains constant at 17,600 units, but the sales price decreases by 15 percent from its year 2014 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.



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  • CreatedOctober 14, 2014
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