Question: The Canton Corporation shows the following income
The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting.
a. Assume in 20X2 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 after tax income for 20X2.
b. In part a, by what percent did after tax 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 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 after tax income.
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