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 so 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: $12 Price Unit variable cost $3 Total fixed cost $31,500 40 % Tax rate Kalman wants to earn after-tax income of $9,000 next year. What is the before-tax income? Before-tax income - $9,000/(1 -0.4) = $15,000 Suppose Kalman's tax rate was 35%, the before-tax income needed to earn $9,000 after taxes would be $15,000. The before tax income in this case would be s (Round to the nearest dollar). The sales revenue needed to earn this level of before tax income would be $ (Round to the nearest dollar). We can show that this is true by constructing an income statement Sales $60,461 Suppose Kalman's tax rate was 35%, the before-tax income needed to earn $9,000 after taxes would be $15,000. 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 to the nearest dollar). We can show that this is true by constructing an income statement. Sales Total variable cost (0.25 * $60,461) Contribution margin Total fixed cost $60,461 15,115 $45,346 31,500 $13,846 4,846 $9,000 Operating income Less: income taxes (0.35 x $13,846) After-tax income 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 Tax Before-Tax Income Needed Sales Revenue Income Rate A. 40% B. $8,000 $8,000 $8,000 35% C. 25%