Question
2. Kamili Company reported the following income statement items for Year 1.Sales ......................................................................................... $100,000Net income (after income taxes) ................................................ 4,800Operating income ....................................................................... 15,000Gross profit ..................................................................................
2. Kamili Company reported the following income statement items for Year 1.Sales ......................................................................................... $100,000Net income (after income taxes) ................................................ 4,800Operating income ....................................................................... 15,000Gross profit .................................................................................. 45,000
Note: Gross Profit = Sales - Cost of Goods SoldOperating Income = Gross Profit - Selling and Administrative ExpenseNet Income = Operating Income - Interest Expense - Income Tax Expense
Additional data available to the management of Kamili Company indicate that cost of goods sold includes $25,000 in fixed costs (plus some amount of variable cost). In addition, selling and administrative expense includes $20,000 in fixed costs (plus some amount of variable cost). Kamili's income tax rate is 40%.
Assume that the sales amount were to grow to $120,000. Also assume that this sales increase can be accomplished with no increase in total assets and thus no change in total financing. Estimate the following quantities under this assumption of sales of $120,000.
Contribution Margin_
Operating Income_
Interest Expense_
Income Tax Expense_
Net Income_
For all questions, I need to see your answer (clearly labeled) and your calculations.
Hints n Start by constructing a contribution margin income statement with sales of $100,000. n Total contribution margin increases at the same rate as sales increases. Therefore, if sales increase by 20%, then contribution margin will also increase by 20%. n Remember that in this example (because there is no change in total financing), the amount of interest expense is fixed whether sales are $100,000 or $120,000.
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