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	$10
Unit variable cost	$2.8
Total fixed cost	$28,300
Tax rate	40%

Kalman wants to earn after-tax income of $7,620 next year. What is the before-tax income?

Before-tax income = $7,620/(1 - 0.4) = $12,700

Suppose Kalman's tax rate was 35%, the before-tax income needed to earn $7,620 after taxes would be - Select your answer -higher thanlower thanequal toItem 1 $12,700.

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	$55,588
Total variable cost (0.28 $55,588)	15,565
Contribution margin	$40,023
Total fixed cost	28,300
Operating income	$11,723
Less: income taxes (0.35 $11,723)	4,103
After-tax income	$7,620

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.	$6,790	40%	$	$
B.	$6,790	35%	$	$
C.	$6,790	25%	$	$