Assignment: 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:
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Price
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$14
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Unit variable cost
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$3.92
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Total fixed cost
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$30,600
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Tax rate
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40%
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Kalman wants to earn after-tax income of $9,780 next year. What is the before-tax income?
Before-tax income = $9,780/(1 - 0.4) = $16,300
Suppose Kalman's tax rate was 35%, the before-tax income needed to earn $9,780 after taxes would be _________________ $16,300.
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.
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Sales
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$63,397
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Total variable cost (0.28 × $63,397)
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17,751
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Contribution margin
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$45,646
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Total fixed cost
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30,600
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Operating income
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$15,046
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Less: income taxes (0.35 × $15,046)
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5,266
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After-tax income
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$9,780
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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.)
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Target After-Tax Income
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Tax Rate
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Before-Tax Income
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Needed Sales Revenue
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A.
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$9,080
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40%
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$ _________
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$ _________
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B.
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$9,080
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35%
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$ __________
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$ __________
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C.
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$9,080
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25%
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$ __________
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$ ___________
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