Question

KTR Company earns a $34 profit on each unit of manufactured goods, and it sells 68 million units each year. KTR's income tax rate is 20 percent. However, the jurisdiction in which KTR operates just increased the tax rate to 25 percent for next year. KTR's owners are considering two alternatives. They could simply accept the $115.6 million tax increase as a reduction in their after-tax profit, or they could raise the price of each unit by 17 dollars, thereby increasing the profit per unit to $35.70. However, the marketing department estimates that the price increase could reduce annual sales to 64.6 million units. a. Calculate the taxable income, income tax costs, and after tax profit for each alternatives. b. Which alternative is better for KTR's owners? Complete this question by entering your answers in the tabs below. Required A Required B Calculate the taxable income, income tax costs, and after tax profit for each alternatives. (Enter your answers in dollars not in millions of dollars.) Alternative 1 Alternative 2 Taxable income Income tax costs After tax profit Required B >

Answer 1

(amount in $ million)
	Alternative 1	Alternative 2
Taxable income	2,312.00	2,306.22
Income tax costs	578.00	576.56
After tax profits	1,734.00	1,729.67
Although the after tax profit per unit under the increased selling price
proposal of the management would increase by $ 1.28 but due to
reduction in units sold from 68 million to 64.60 million would result
in lower total after tax profits which would be reduced by $ 4.34
million.
KTR Company should go with the "Alternative 1" where the company
continues to sell the units at the current prices and accepts the
additional income tax cost of $ 115.60 as reduction in their after tax
profits.
Working Notes
Computation of Total profits
	Alternative 1	Alternative 2
Profit per unit	34.00	35.70
No. of units sold(in million)	68.00	64.60
Total profit(in million)	2,312.00	2,306.22
Computation of Income tax costs
	Alternative 1	Alternative 2
Total profit(in million)	2,312.00	2,306.22
Tax rate	0.25	0.25
Income tax cost(in million)	578.00	576.56