Question

The marion's clothing has a gross profit of $700,000 and $240,000 in depreciation expense. the preston's pants also has $700,000 in gross profit, with $40,000 in depreciation expense. selling and administrative expense is $160,000 for each company. given that the tax rate is 40 percent, compute the cash flow for both companies. which answer below explains the comparison between the companies
a. both companies are the same with no differences
b. marion's had $200,000 more in depreciation which provided $80,000 (0.40 x $200,000) more in cash flow.
c. preston's had less depreciation which provided it with more spendable resources.
d. marion's paid more taxes therefore preston's had more income.

Answer 1

So, doing the calculations, Marion's had $700,000-240,000=$460,000-160,000 in expenses = $300,000 x 0.4 income tax=120,000 and so 300,000-120,000=$180,000 net value. Preston's had $700,000-40,000 depreciation=$660,000-160,000 expenses =$500,000 x 0.4 taxes= 200,000 taxes so 500,000-200,000=$300,000 net value. The result is Preston's had less depreciation which provided it with more spendable income.