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Blanchard Company manufactures a single product that sells for $140 per unit and whose total variable costs are $112 per unit. The company’s annual fixed costs are $623,000. The sales manager predicts that annual sales of the company’s product will soon reach 39,300 units and its price will increase to $193 per unit. According to the production manager, variable costs are expected to increase to $133 per unit, but fixed costs will remain at $623,000. The income tax rate is 30%. 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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Answer:

Blanchard Company's Predicted Income Statement:

Sales (39,300 x $193) - $7,584,900

VC (39,300 x $133) - ($5,226,900)

Contribution - $2,358,000

FC - ($623,000)

Pre-Tax Income $1,735,000

Income Tax 30% ($520,500)

After Tax Income $1,214,500

Explanation:

a) The contribution is the product of sales revenue less variable cost.  The contribution per unit is equal to sales price less variable cost per unit, multiplied by quantity.  Predicted quantity is 39,300 and contribution per unit is $60 ($193 - $133).  This gives a total contribution of $2,358,000 (39,300 x $60).

b) The Pre-Tax Income is contribution less Fixed Cost.  This gives us $1,735,000 ($2,358,000 - $623,000).

c) The After-Tax Income is obtained after applying 30% tax rate on the Pre-Tax Income of $1,735,000.  This gives us $1,214,500.

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