KTR Company earns a $6 profit on each unit of manufactured goods, and it sells 12...
KTR Company earns a $6 profit on each unit of manufactured goods, and it sells 12 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 $3.6 million tax increase as a reduction in their after-tax profit, or they could raise the price of each unit by 30 cents, thereby increasing the profit per unit to $6.30. However, the marketing department estimates that the price increase could reduce annual sales to 11.4 million units.
- Calculate the taxable income, income tax costs, and after tax profit for each alternatives.
- Which alternative is better for KTR’s owners?
Homework Answers
Answer a:
Taxable income, income tax costs, and after tax profit for each alternatives are calculated and given below:
Answer b:
Alternative "simply accept the $3.6 million tax increase as a reduction in their after-tax profit" is better for KTR’s owners.
Reason:
After tax profit, for this alternative (simply accept) is higher by (54000000 - 53865000=) $135,000 as compared to alternative 'Raise the price"
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