a) Assume in 2009 the same 10,000-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 $10 per unit. Also assume that seliing and administrative expense will be 5 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute aftertax income for 2009.
b) In part a, by what percent did aftertax income increase as a result of a 10 percent increase in the sales price? Explain why this impact occurred.
c) Now assume that in 2010 the volume remians constant at 10,000 units, but the sales price decreases by 15 percent from its year 2009 level. Also, because of FIFO inventory policy, costs of goods sold reflects the inflationary conditions of the prior year and is $11 per unit. Further, assume selling and administrative expense will be 5 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the aftertax income.
The solution explains how to calculate the after tax income given the changes in inventory