What is the total value of taxes paid in the following example if the value added tax is 10%? A farmer raises wheat that he sells for $1.50 to the grain company. The grain company sells to the processor for $2.00 per bushel. The processor turns the wheat into a breakfast cereal and wholesales it for $3.00 per bushel. The retailer sells the cereal for $4.00 per bushel.
A) $0.15
B) $0.20
C) $0.30
D) $0.40

Question

Quizplus · Accepted Answer

The total value of taxes paid is calculated by applying the 10% VAT at each stage of value addition. The farmer sells for $1.50 (no value added before this), the grain company adds $0.50 value ($2.00 - $1.50), the processor adds $1.00 value ($3.00 - $2.00), and the retailer adds $1.00 value ($4.00 - $3.00). The VAT paid is thus 10% of each value addition: $0.05 (grain company) + $0.10 (processor) + $0.10 (retailer) = $0.25. However, considering the initial explanation might have been simplified, and the correct calculation for the total VAT should include all stages of value addition correctly, which would indeed sum up to $0.40 when considering the VAT on the initial sale by the farmer as well, making the correct total VAT calculation as follows: $0.15 (farmer to grain company) + $0.05 (grain company to processor) + $0.10 (processor to retailer) + $0.10 (retailer to consumer) = $0.40. This accounts for the VAT at each stage of the supply chain, correctly applying the 10% rate to the value added at each transaction.

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