Common Sized Income Statement for 2012 Proforma Income Statement - Project Sales

Question

Common Sized Income Statement for 2012

Proforma Income Statement - Project Sales Revenue ($2.75 million)

Bonus Questions.

Use the data from above.

There is a big political debate happening in the country. The lead candidate believes that those with the highest incomes should pay higher taxes (corporate or individual doesn't matter). He's elected president and in fact does raise taxes. If the companies projected sales revenue of 2.75 million causes the average corporate income tax rate to increase to 45%, what is the impact on the company's net profit after taxes?



Knowing the impact to the net profit after taxes (you, as the company's manager), do you want to increase sales revenue as projected or do you discourage growth? Explain.



Which political party is most likely to stifle business growth by raising taxes? Explain.

Common Sized Income Statement ($'000) Particulars Amount % Sales Revenue             2,200 100% Less Cost of Goods sold             1,420 65% Gross Profit                 780 35% Less: Operating Expenses        Selling expense                 300 14% G&A                 270 12% Depreciation                   30 1% Total Operating Expenses                 600 27% Operating profits                 180 8% Less: Interest Expense                   29 1% Net Profit Before tax                 151 7% Less: Taxes (30%)                   45 2% Net Profit After Tax (Earnings Available to Common Stockholders)                 106 5%

Explanation / Answer

Income statement 2012 Details Amount '000 $ % Sales                          2,200                                          100 Net Profit before Tax                             151 7% Taxes @30%                                45 2% Net Profit After Tax                             106 5% Projected Income statement at Current Tax rate Details Amount '000 $ % Sales                          2,750                                          100 Net Profit before Tax                             189 7% Taxes @30%                                57 2% Net Profit After Tax                             132 5% Projected Income statement at Tax rate 45% Details Amount '000 $ % Sales                          2,750                                          100 Net Profit before Tax                             189 7% Taxes @30%                                85 3% Net Profit After Tax                             104 4% Thefore net profit reduced by $28000 at 2.75 M sale revenue level with increased Tax from 30% to 45%. The net profit even reduced by $2000 from 2.2 M sales level With the new tax rate of 45% , the Tax amount increases and net profit after tax available for shareholders reduce to $104,000, even lower than the 2012 net profit. So with higher tax rate , it is not advisable to strive for growth which has an adverse impact on net income. The incumbent President's Tax policy is not conducive to growth and in fact stifle business growth by raising tax for higher income.

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