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MakeStuff Company
The MakeStuff Company's earnings stream is highly dependent on the cost of a key commodity input.Management believes taxable earnings will be $100,000 if the input price is low,taxable earnings will be $50,000 if the input price is at a moderate level,but earnings will be zero if the input price is high.Management sees these outcomes as being equally likely.The company pays a 15% tax rate on the first $50,000 of taxable earnings,and a 25% rate on all earnings above $50,000.
-What is MakeStuff's tax liability if the input price is at the moderate level?

Question

Quizplus · Accepted Answer

At the moderate level, taxable earnings are $50,000. The entire amount is taxed at 15%, resulting in a tax liability of $7,500 (0.15 * $50,000).

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