Ajax Company pays 15% on the first $50,000 of pretax income and 28% on any additional pretax income.Ajax Company currently earns $52,000.An investment under consideration is expected to add $20,000 in pretax income.What is the tax rate on the additional income from the investment?

Question

Quizplus · Accepted Answer

The first $50,000 of pretax income is taxed at 15%. This means that Ajax Company pays:

$50,000 x 0.15 = $7,500

on the first $50,000 of their income.

Any additional pretax income is taxed at 28%.

If Ajax Company earns $52,000 currently, this means that they are already paying:

$50,000 x 0.15 = $7,500

on the first $50,000 of their income, leaving $2,000 left over to be taxed at the higher rate of 28%.

Therefore, their tax on the extra $20,000 in pretax income expected from the investment would be:

($20,000 - $2,000) x 0.28 = $5,040

The tax rate on the additional income from the investment is the amount of tax paid on the additional income divided by the amount of additional income, or:

$5,040 / $20,000 = 0.252 = 25.2%

However, the answer choices do not include this exact percentage. The closest answer choice is C, 28%, which is the tax rate for any additional income over $50,000. Thus, the best choice would be C, with the explanation that while the exact tax rate on the additional income is 25.2%, the closest answer choice is 28%.

Ajax Company Pays 15% on the First $50,000 of Pretax