What impact do income taxes have on the sales volume required to earn a desired after-tax...
What impact do income taxes have on the sales volume required to earn a desired after-tax profit?
Homework Answers
Answer:-
The sales volume required to earn desired after tax profit would be more in case of a firm which is subject to income tax rather than a firm which is not subject to income tax. This is because in the case of firm subject to income tax the amount of after tax desired profit has to be grossed up to desired profit before tax to arrive at the figure of sales volume required.
The following illustration will help understand the impact income taxes have on the sales volume required to earn a desired after tax profit:-
Suppose there are two firms A & B. The firm A is subject to 20% taxes and firm B is exempt from income tax. The data for both the firms is as:-
| Firm A | Firm B | |
| Sellin Price per unit | $250 | $250 |
| Variable Cost per unit | $150 | $150 |
| Fixed Costs | $50000 | $50000 |
| Desired Profit After Tax | $30000 | $30000 |
| A | B | |
| Desired profit After Tax | $30000 | $30000 |
| Tax rate | 20% | Nil |
| Desired profit before Taxes(Desired profit/(1-Tax rate)) | $37500($30000/1-.20) | $30000 |
| Contribution/unit=Sellin price/unit - V. costs per unit | $250 - $150= $100 | $250 - $150= $100 |
| Sales Volume required to earn desired profit= | (Fixed Costs + Desired Profit)/Contribution/unit | (Fixed Costs + Desired Profit)/Contribution/unit |
| Sales Volume required to earn desired profit= | ($50000+$37500)/$100 | ($50000+$30000)/$100 |
| Sales Volume required to earn desired profit= | 875 Units | 800 Units |
This shows that Firm A has to sell more units than Firm B to earn the same profit after taxes.
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Direct labor
$88.00
Variable overhead
$20.00
Total fixed factory overhead
$440,000
Variable selling expense is $16 per unit; fixed selling and
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40 percent.
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1. Calculate the before-tax profit needed to
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Olivian Company wants to earn $360,000 in net (after-tax) income
next year. Its product is priced at $400 per unit. Product costs
include:
Direct materials
$120.00
Direct labor
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Variable overhead
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Total fixed factory overhead
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administrative expense totals $290,000. Olivian has a tax rate of
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1. Calculate the before-tax profit needed to
achieve an after-tax target of $360,000....
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