2-47 Tax Effects, Multiple Choice

(CMA.) Study Appendix 2B. DisKing Company is a wholesaler for video tapes. The pro-

jected after-tax net income for the current year is $120,000 based on a sales volume of

200,000 video tapes. DisKing has been selling the tapes at $16 each. The variable costs

consist of the $10 unit purchase price and a handling cost of $2 per unit. DisKing's annual

fixed costs are $600,000, and DisKing is subject to a 40% income tax rate.

Management is planning for the coming year when it expects that the unit purchase

price will increase 30%.

1. DisKing Company's break-even point for the current year is (a) 150,000 units (b) 100,000

units (c) 50,000 units (d) 60,000 units (e) some amount other than those given.

2. An increase of 10% in projected unit sales volume for the current year would result

in an increased after-tax income for the current year of (a) $80,000 (b) $32,000

(c) $12,000 (d) $48,000 (e) some amount other than those given.

3. The volume of sales in dollars that DisKing Company must achieve in the coming

year to maintain the same after-tax net income as projected for the current year if

unit selling price remains at $16 is (a) $12,800,000 (b) $14,400,000 (c) $11,520,000

(d) $32,000,000 (e) some amount other than those given.

4. To cover a 30% increase in the unit purchase price for the coming year and still

maintain the current contribution-margin ratio, DisKing Company must establish a

selling price per unit for the coming year of (a) $19.60 (b) $20.00 (c) $20.80

(d) $19.00 (e) some amount other than those given.