Sales Revenue Question Managerial Accounting Question

Question

The CEO of Madison. Inc. has provided you with the following information for its operation for 2013. Dollar figures are in thousands.

Sales Revenue : $200

Cost of Goods Sold : $120

Total Contribution Margin : $100

Fixed Costs : Manufacturing : $40

Fixed Costs : Selling and Adminstrative : $20

Variable Selling Expense : $20

The tax rate for Newark is 25%. If they want to increase the after-tax income for 2014 by $15, by how much do they have to increase their sales revenue? Assume everything else remains constant (including the price)

A) 20

B) 30

C) 40

D) 50

E) None

Please show help with steps

Answer 1

contribution margin = sales revenue - cost of goods which you gave as $100,000
 Should that number be $80,000?
 
if the number is $80,000, then the company earned $0 profit, and paid no taxes.
 
if the fixed costs and variable selling expense stay the same, then we will have to work from the bottom up to solve this problem
 
1. desired goal = $15,000 after tax profit
2. tax rate = 25% = 0.25
3. let x = profit before taxes, then x - (0.25x) = $15,000
4. solving, 0.75x = $15,000; x = $20,000
5. if the Manufacturing, S & A, and Variable costs stay the same, then that subtotal will be $80,000
6. thus, some margin - expenses = $20,000; but we know that expenses will be $80,000, so the margin will be $100,000
7. if the ratio of Sales revenue to Cost of Goods remains the same, then desired sales - (sales x 0.6) = $100,000
thus 0.4 x sales = $100,000; solving sales = $250,000
8. the ratio of sales to cost of goods was 60%, thus sales revenue of $250,000 - 150,000 = margin of $100,000
Summary:
Sales Revenue :                               $250,000
Cost of Goods Sold :                         -150,000
Total Contribution Margin :                $100,000
Fixed Costs : Manufacturing :               -40,000
Fixed Costs : Selling and Adminstrative -20,000
Variable Selling Expense :                    -20,000
Profit before taxes:                             $20,000
The tax rate for Newark is 25%.             -5,000
desired profit                                      $15,000

9. lastly, $250,000 - 200,000 = $50,000 so the answer is option D