The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting. CANTON CORPORATIONIncome Statement for 20X1Sales $126,000 (10,500 units at $12.00)Cost of goods sold 73,500 (10,500 units at $7.00)Gross profit $52,500 Selling and administrative expense 7,560 Depreciation 12,700 Operating profit $32,240 Taxes (30%) 9,672 Aftertax income $22,568 Assume in 20X2 the same 10,500-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 $7.00 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 20X2.

The Canton Corporation

CANTON CORPORATION Income Statement for 20X2

Sales (10,500 units at $13.20)                        $138,600

Cost of goods sold  (10,500 units at $7.00)     73,500

Gross profit                                                       $65,100

Selling and administrative expense                     8,316

Depreciation                                                        12,700

Operating profit                                               $44,084

Taxes (30%)                                                        13,225

After Tax income                                            $30,859

Explanation:

a) Data and Calculations:

CANTON CORPORATION Income Statement for 20X1

Sales $126,000 (10,500 units at $12.00)  

Cost of goods sold 73,500 (10,500 units at $7.00)

Gross profit $52,500

Selling and administrative expense 7,560

Depreciation 12,700

Operating profit $32,240

Taxes (30%) 9,672

After Tax income $22,568

20x2:

Selling price = $13.20 ($12 x 1.1)

Sales (10,500 units at $13.20)  = $138,600

Cost of goods sold (10,500 units at $7.00) = $73,500

Selling and administrative expense = 6% of $138,600 = $8,316

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