Problem 3-31 Inflation and inventory accounting effect [LO5]

The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting.

CANTON CORPORATION Income Statement for 2013
Sales	$	307,100	(16,600 units at $18.50)
Cost of goods sold		199,200	(16,600 units at $12.00)
Gross profit	$	107,900
Selling and administrative expense		18,426
Depreciation		11,600
Operating profit	$	77,874
Taxes (30%)		23,362
Aftertax income	$	54,512

a.

Assume in 2014 the same 16,600-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 $12.00 per unit. Also assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute aftertax income for 2014.(Do not round intermediate calculations. Round your answer to the nearest whole number.)

Aftertax income

$

b.	In parta, by what percent did aftertax income increase as a result of a 10 percent increase in the sales price?(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Gain in aftertax income

%

c.

Now assume that in 2015 the volume remains constant at 16,600 units, but the sales price decreases by 15 percent from its year 2014 level. Also, because of FIFO inventory policy, cost of goods sold reflects the inflationary conditions of the prior year and is $12.50 per unit. Further, assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the aftertax income.(Round the sales price per unit to 2 decimal places but do not round any other intermediate calculations. Round your final answer to the nearest whole dollar amount.)

Aftertax income

$

References