There are three production stages required before a bicycle produced by Masi Bicicletia S.A.can be sold at retail for €3,500.The VAT rate is 15%.Find the total tax liability due. $\begin{array}{crc}
\text { Production stage } & \text { Selling price } & \text { Value Added }& \text { Incremental VAT } \
1 & € 1,000 & \
2 & € 1,750 \
3 & € 3,500
\end{array}$

Question

There are three production stages required before a bicycle produced by Masi Bicicletia S.A.can be sold at retail for €3,500.The VAT rate is 15%.Find the total tax liability due. $\begin{array}{crc}
\text { Production stage } & \text { Selling price } & \text { Value Added }& \text { Incremental VAT  }  \
1 & € 1,000 & \
2 & € 1,750 \
3 & € 3,500
\end{array}$

Quizplus · Accepted Answer

To find the total tax liability, we need to calculate the incremental VAT at each production stage and add them together.

For stage 1: 
Value Added = Selling price 
Incremental VAT = Value Added x VAT rate = €1,000 x 0.15 = €150

For stage 2: 
Value Added = Selling price - Value Added from previous stage 
Value Added = €1,750 - €1,000 = €750 
Incremental VAT = Value Added x VAT rate = €750 x 0.15 = €112.50

For stage 3: 
Value Added = Selling price - Value Added from previous stage 
Value Added = €3,500 - €1,750 = €1,750 
Incremental VAT = Value Added x VAT rate = €1,750 x 0.15 = €262.50

Total tax liability = incremental VAT at each stage added together 
Total tax liability = €150 + €112.50 + €262.50 = €525

Therefore, the best answer is A.

There Are Three Production Stages Required Before a Bicycle Produced