Question
Units and Sales to Earn After-Tax Target Profit When looking for the number of units, or amount of sales dollars to earn a target profit,
Units and Sales to Earn After-Tax Target Profit
When looking for the number of units, or amount of sales dollars to earn a target profit, we have been talking about before-tax profit. If a company wants to determine the units or sales dollars to earn an after-tax target profit, that profit must be restated into before-tax terms. This is because the tax rate (used to turn before-tax profit into after-tax profit) is not a part of the breakeven equation.
To convert before-tax income to after-tax income, divide the before-tax income by 1 minus the tax rate.
Example: Kalman Company has the following information:
Price | $13 |
Unit variable cost | $3.64 |
Total fixed cost | $29,000 |
Tax rate | 40% |
Kalman wants to earn after-tax income of $7,500 next year. What is the before-tax income?
Before-tax income = $7,500/(1 - 0.4) = $12,500 |
Suppose Kalman's tax rate was 35%, the before-tax income needed to earn $7,500 after taxes would be - Select your answer -higher thanlower thanequal toItem 1 $12,500.
The before-tax income in this case would be $ (round to the nearest dollar).
The sales revenue needed to earn this level of before-tax income would be $ (round your intermediate calculations and final answer to the nearest dollar).
We can show that this is true by constructing an income statement.
Sales | $56,303 |
Total variable cost (0.28 $56,303) | 15,765 |
Contribution margin | $40,538 |
Total fixed cost | 29,000 |
Operating income | $11,538 |
Less: income taxes (0.35 $11,538) | 4,038 |
After-tax income | $7,500 |
Using the Kalman Company data, for each of the following scenarios, fill in the before-tax income needed and the sales revenue needed to earn the given after-tax income. (Round all dollar amounts to the nearest dollar.)
Target After-Tax Income | Tax Rate | Before-Tax Income | Needed Sales Revenue | |
---|---|---|---|---|
A. | $6,440 | 40% | $ | $ |
B. | $6,440 | 35% | $ | $ |
C. | $6,440 | 25% | $ | $ |
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