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Monday, 13 June 2016

Blanchard Company manufactures a single product that sells for $120 per unit and whose total variable costs are $84 per unit.

Blanchard Company manufactures a single product that sells for $120 per unit and whose total variable costs are $84 per unit. The company’s annual fixed costs are $627,000. The sales manager predicts that annual sales of the company’s product will soon reach 39,700 units and its price will increase to $197 per unit. According to the production manager, the variable costs are expected to increase to $137 per unit but fixed costs will remain at $627,000. The income tax rate is 35%. What amounts of pretax and after-tax income can the company expect to earn from these predicted changes?
 
Prepare a forecasted contribution margin income statement. 
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Explanation:
BLANCHARD COMPANY
Forecasted Contribution Margin Income Statement
  Sales (39,700 × $197)   $ 7,820,900  
  Variable costs (39,700 × $137)     5,438,900  
   

 
  Contribution margin (39,700 × $60)     2,382,000  
  Fixed costs     627,000  
   

 
  Income before taxes     1,755,000  
  Income taxes (35% × $1,755,000)     614,250  
   

 
  Net income   $ 1,140,750