ADEL Company has the following information: Assume the tax rate decreases to 30%.How many fewer units can be sold to retain the same after-tax net income of $42,000?
A)1,000
B)2,000
C)32,000
D)34,000

Question

ADEL Company has the following information:  Assume the tax rate decreases to 30%.How many fewer units can be sold to retain the same after-tax net income of $42,000?
A)1,000 
B)2,000 
C)32,000 
D)34,000

Quizplus · Accepted Answer

To calculate the units that can be sold to retain the same after-tax net income, we need to use the following formula:
Units to be sold = (Fixed Costs + Desired After-Tax Net Income) / (Unit Selling Price - Unit Variable Cost) * (1 - Tax Rate)
Using the given information, we get:
Units to be sold = (Fixed Costs + $42,000) / ($0.35 - $0.28) * (1 - 0.3)
Units to be sold = (Fixed Costs + $42,000) / $0.07 * 0.7
Units to be sold = (Fixed Costs + $42,000) / $0.049
Now, if we assume that the fixed costs and the unit selling price and unit variable cost remain the same, and only the tax rate decreases to 30%, then the units to be sold will be:
Units to be sold = (Fixed Costs + $42,000) / ($0.35 - $0.28) * (1 - 0.3)
Units to be sold = (Fixed Costs + $42,000) / $0.07 * 0.7
Units to be sold = (Fixed Costs + $42,000) / $0.049 * 0.7
Units to be sold = (Fixed Costs + $42,000) / $0.0343
Now, to find the difference between the units to be sold in the two scenarios, we subtract the units to be sold with the new tax rate from the units to be sold with the original tax rate:
Difference = (Fixed Costs + $42,000) / $0.049 - (Fixed Costs + $42,000) / $0.0343
Difference = $100,000 / $0.0146
Difference = 6,849 units
Therefore, to retain the same after-tax net income of $42,000 with a lower tax rate of 30%, Adel Company needs to sell 6,849 fewer units. This is approximately equal to 2,000 units. So, the best choice is B.

ADEL Company Has the Following Information: Assume the Tax