# Income taxes affect the calculation of the volume

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Income taxes affect the calculation of the volume required to achieve a specified after-tax target profit.
Cost-Volume-Profit (CVP) relationship on an after- tax basis Winston Wending Machine Example: Suppose that a company earns \$1,440 before Taxes and pays income tax at a rate of 40%. Income before income tax \$1440 100% Income tax 576 40% -------- ------ After tax net income \$864 60%
Cost-Volume-Profit (CVP) relationship on an after- tax basis After-tax income = Target income before taxes * (1 tax rate) Target income before taxes = Target after-tax net income 1 tax rate Target sales - Variable expenses - Fixed expenses = Target after-tax net income ÷ (1 tax rate)
Cost-Volume-Profit (CVP) relationship on an after- tax basis Target income before taxes = \$ 864 = \$1,440 1 0.40 Selling Price is \$1.50 per unit, variable cost is \$1.20 per unit, Total fixed cost is \$18000. Assume that target after-tax net income is \$864. The equation to find N, the number of units to be sold to achieve the after-tax income target of \$864 is as follows
Cost-Volume-Profit (CVP) relationship on an after- tax basis \$1.50N - \$1.20N - \$18,000 = \$864 ÷ (1 0.40) \$.30N = \$18,000 + (\$864/.6) \$.18N = \$10,800 + \$864 = \$11,664 N = \$11,664/\$.18 N = 64,800 units
Cost-Volume-Profit (CVP) relationship on an after- tax basis Suppose target net income after taxes was \$1800 \$1.50N - \$1.20N - \$18,000 = \$1800 ÷ (1 0.40) \$.30N - \$18,000 =\$3000 \$0.30N = \$3000 + \$18000 \$0.30N = \$21000 N = 70,000 units
End of Chapter 2

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