Units and Sales to Earn After-Tax Target Profit When looking for the number of u
ID: 2485649 • Letter: U
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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:
Kalman wants to earn after-tax income of $7,620 next year. What is the before-tax income?
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.
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.)
Price $10 Unit variable cost $2.8 Total fixed cost $28,300 Tax rate 40%Explanation / Answer
CM ratio =contribution /sales
= 40023/55588 = .72
Target after tax income (X) Tax rate (t) Before tax income =x/ (1-t) fixed cost contribution = (Before tax income +fixed cost) needed sales revenue A 6790 .40 6790/(1-.40) = 6790/.60 = $ 11316.67 28300 39616.67 39616.67/ .72 = $ 55023 B 6790 .35 6790 /(1-.35) = 6790 / .65 = $ 10446.15 28300 38746.15 38746.15/.72 = 53814 C 6790 .25 6790 /(1-.25)= 6790 / .75 = $ 9053.33 28300 37353.33 37353.33/.72 = 51880Related Questions
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