@Felix The Cat do you still need help with your question- I know its old news by probably.
A professor in Wiley explained it really well- yes it is after tax
The easiest way to solve this problem is to: 1) create an outline of a Contribution-Margin Based Income Statement; 2) fill in as much information as we can from the material provided in the questions; 3) using the information provided, work backwards through the Income Statement, filling out as much information as you can.
Here's a detailed description of this process.
1. Create a format for a CM-based income statement:
+Sales
– Variable Costs
=Contribution Margin
– Fixed Costs
=Operating Income
– 40% Income Tax
=Net Income
2. Add values to the format based on the information provided in the question; leave question marks for unknowns:
+___???____Sales ($7.50 X # units sold)
-___???_____Variable Cost ($2.25 X # units sold)
=___???____Contribution Margin
__105,000___Fixed Costs (20,000 breakeven units * $5.25 unit CM)
=___???_____Operating Income
-____???____40% Income Tax
=__5,040____Net Income
3. Solve for unknowns:
+___???___Sales ($7.50 X # units sold)
-___???____Variable Cost ($2.25 X # units sold)
=113,400__Contribution Margin <<==3rd calculation
-_105,000__Fixed Costs (20,000 breakeven units * $5.25 unit CM)
=__8,400__Operating Income (.6X =5,040; X = 5,040/.6; X = 8,400) <<==1st calculation
-___3,360__40% Income Tax (8,400 X 40%) <<==2nd calculation (not absolutely required, but I did it to double-check my work)
=__5,040__Net Income ==> this is 60% of Operating Income
Since all we need to solve the problem is the number of units sold during the current period, we do not need to complete the rest of the income statement: dividing the total contribution margin by the unit contribution margin will yield the number of units sold:
$113,400 / $5.25 = 21,600
The question states that we will sell 1,000 more units during the next period, which means that total units sold next period will be 22,600 (21,600 + 1,000).
.