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.
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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%
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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)
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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
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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
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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
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End of Chapter 2
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