Blanchard Company manufactures a single product that sells for $190 per unit and whose total variable costs are $150 per unit. The company’s annual fixed costs are $635,000. The sales manager predicts that annual sales of the company’s product will soon reach 40,500 units and its price will increase to $205 per unit. According to the production manager, variable costs are expected to increase to $145 per unit, but fixed costs will remain at $635,000. The income tax rate is 20%. What amounts of pretax and after-tax income can the company expect to earn from these predicted changes?

The amounts of pretax and after-tax income can the company expect to earn from these predicted changes are $1,795,000  and $1,436,000  respectively.

Explanation:

The sales less the variable cost gives the contribution margin.

The contribution margin less the fixed cost gives the net operating income.  Furthermore, net income is the difference between the total sales and the total costs (fixed and variable).

Both sales and variable cost are dependent on the number of units sold.

with these expected changes,

Pretax Income

= 40,500($205 - $145) - $635,000

= $1,795,000

After tax income

= 80% * $1,795,000

= $1,436,000

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