Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and $1,250 of depreciation.The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 25%.This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725.By how much will the depreciation change cause the firm's net after-tax income to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

Question

Quizplus · Accepted Answer

The increase in depreciation is $725. This reduces taxable income by $725. The tax savings from this reduction is $725 * 25% = $181.25. Therefore, the net income decreases by $725 - $181.25 = $543.75.

Last Year, Michelson Manufacturing Reported $10,250 of Sales, $3,500 of Operating