A company, subject to a 40% tax rate, desires to earn $500,000 of after-tax income.How much should the ﬁrm add to ﬁxed costs when ﬁguring the sales revenues necessary to produce this income level?

Question

Quizplus · Accepted Answer

To earn $500,000 of after-tax income, the company needs to earn $833,333 before taxes ($833,333 * 60% = $500,000). Since total costs = fixed costs + variable costs, the company needs to add $833,333 - variable costs to fixed costs to achieve the desired after-tax income level. Assuming variable costs are 70% of sales, the company needs to add $833,333 - ($833,333 * 70%) = $250,000 to fixed costs. Therefore, the answer is choice D, $250,000.

A Company, Subject to a 40% Tax Rate, Desires to Earn