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 after taxes at a 40% tax rate, the pre-tax income needed is $500,000 / (1 - 0.40) = $833,333. This is the amount that should be added to fixed costs to figure out the necessary sales revenue.

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