27 4.7 Income Taxes and Cost-Volume-Profit Analysis
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Last updated
- Dec 28, 2020
Learning Objectives
- Understand the effect of income taxes on cost-volume-profit analysis.
Question: Some organizations, such as not-for-profit entities and governmental agencies, are not required to pay income taxes. However, most for-profit organizations must pay income taxes on their profits. How do we find the target profit in units or sales dollars for organizations that pay income taxes?
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Key Takeaway
Companies that incur income taxes must follow three steps to find the break-even point or target profit.
Step 1. Determine the desired target profit after taxes.
Step 2. Convert the desired target profit after taxes to target profit before taxes using the following formula: Target profit before taxes = Target profit after taxes ÷ (1 − tax rate)
Step 3. Use the target profit before taxes from step 2 in the appropriate target profit formula to calculate the target profit in units or in sales dollars.
Review problem 4.7
This review problem is based on the information for Snowboard Company. Assume Snowboard’s tax rate remains at 20 percent.
- Use the three steps described in this section to determine how many units Snowboard Company must sell to earn a monthly profit of $50,000 after taxes.
- Use the three steps to determine the sales dollars Snowboard needs to earn a monthly profit of $60,000 after taxes.
