A company with pretax income of $60,000 is required to pay taxes of 20 percent on all income up to $20,000 and 32 percent on any income in excess of $20,000. The company's average tax rate is

Question

Quizplus · Accepted Answer

To calculate the average tax rate, we need to find the total tax paid divided by the total income.

For income up to $20,000, the company pays 20% tax which is $4,000 (20,000 x 0.2).

For income over $20,000, the company pays 32% tax. The excess income is $60,000 - $20,000 = $40,000. The tax paid on this income is $12,800 (40,000 x 0.32).

Therefore, the total tax paid is $16,800 ($4,000 + $12,800) and the total income is $60,000.

The average tax rate is then $16,800/$60,000 = 0.28 or 28%. Hence, the correct answer is B.

A Company with Pretax Income of $60,000 Is Required to Pay