Units and Sales to Earn After-Tax Target Profi t When looking for the number of

Question

Units and Sales to Earn After-Tax Target Profi

t 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 $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% $ $

Explanation / Answer

We have:

Price = 10

Variable cost per unit =2.80

Contribution margin per unit = price – variable cost per unit

                                                                =10-2.80

                                                                = $7.20

Total fixed cost = 28,300

A)

Before tax profit = After tax profit /(1- tax rate)

                                = 6790/(1-0.40)

                                = 11,317

Sales revenue = (Fixed cost + Before tax profit)x Price/ contribution margin

                                = (28,300 +11,317) x10/7.20

                                =55024

B)

Before tax profit = After tax profit /(1- tax rate)

                                = 6790/(1-0.35)

                                = 10,446.15

Sales revenue = (Fixed cost + Before tax profit)x Price/ contribution margin

                                = (28,300 +10,446.15) x10/7.20

                                =53,814

C)

Before tax profit = After tax profit /(1- tax rate)

                                = 6790/(1-0.25)

                                = 9053.33

Sales revenue = (Fixed cost + Before tax profit)x Price/ contribution margin

                                = (28,300 +9053.33) x10/7.20

                                =51880

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