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Units and Sales to Earn After-Tax Target Profit

When looking for the number of units, or amount of sales dollars to earn a target profit, we have been talking about before-tax profit. If a company wants to determine the units or sales dollars to earn an after-tax target profit, that profit must be restated into before-tax terms. This is because the tax rate (used to turn before-tax profit into after-tax profit) is not a part of the breakeven equation.

To convert before-tax income to after-tax income, divide the before-tax income by 1 minus the tax rate.

Example: Kalman Company has the following information:

Price	$13
Unit variable cost	$3.64
Total fixed cost	$29,000
Tax rate	40%

Kalman wants to earn after-tax income of $7,500 next year. What is the before-tax income?

Before-tax income = $7,500/(1 - 0.4) = $12,500

Suppose Kalman's tax rate was 35%, the before-tax income needed to earn $7,500 after taxes would be - Select your answer -higher thanlower thanequal toItem 1 $12,500.

The before-tax income in this case would be $ (round to the nearest dollar).

The sales revenue needed to earn this level of before-tax income would be $ (round your intermediate calculations and final answer to the nearest dollar).

We can show that this is true by constructing an income statement.

Sales	$56,303
Total variable cost (0.28 $56,303)	15,765
Contribution margin	$40,538
Total fixed cost	29,000
Operating income	$11,538
Less: income taxes (0.35 $11,538)	4,038
After-tax income	$7,500

Using the Kalman Company data, for each of the following scenarios, fill in the before-tax income needed and the sales revenue needed to earn the given after-tax income. (Round all dollar amounts to the nearest dollar.)

	Target After-Tax Income	Tax Rate	Before-Tax Income	Needed Sales Revenue
A.	$6,440	40%	$	$
B.	$6,440	35%	$	$
C.	$6,440	25%	$	$

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