The Pantene Company is subject to income taxes of 20% on income through $25,000 and 40% on income in excess of $25,000. Projected information for next year follows: $$\begin{array} { l l }
\text { Selling price per unit } & \$ 40 \
\text { Variable costs per unit } & \$ 15 \
\text { Fixed costs } & \$ 400,000 \
\text { Sales in units } & 20,000
\end{array}$$ What is Pantene's projected after-tax profit?

Question

The Pantene Company is subject to income taxes of 20% on income through $25,000 and 40% on income in excess of $25,000. Projected information for next year follows: $$\begin{array} { l l } 
\text { Selling price per unit } & \$ 40 \
\text { Variable costs per unit } & \$ 15 \
\text { Fixed costs } & \$ 400,000 \
\text { Sales in units } & 20,000
\end{array}$$ What is Pantene's projected after-tax profit?

Quizplus · Accepted Answer

To find the after-tax profit, first calculate the total revenue and total costs. Revenue = 20,000 units * $40 = $800,000. Variable costs = 20,000 units * $15 = $300,000. Total costs = Variable costs + Fixed costs = $300,000 + $400,000 = $700,000. Profit before tax = Revenue - Total costs = $800,000 - $700,000 = $100,000. Tax on first $25,000 = 20% * $25,000 = $5,000. Tax on remaining $75,000 = 40% * $75,000 = $30,000. Total tax = $5,000 + $30,000 = $35,000. After-tax profit = $100,000 - $35,000 = $65,000.

The Pantene Company Is Subject to Income Taxes of 20