Question

Howell, Inc., reports 2014 sales of $202 million, income before income taxes of $51.2 million, and tax expense of $9.10 million. If sales are projected to increase by 3.8% next year, projected tax expense for 2014 will be ________.a. $9.68 millionb. $9.10 millionc. $11.05 milliond. There is not enough information to determine the amount.e. $9.45 million

Answer 1

Answer:

There is not enough information to determine the amount

Explanation:

An increase in sales doesn't necessarily mean an increase in before tax income. Sales could increase by 3.8% and the expenses could also increase by a greater/similar percentage leaving behind before tax income constant or decreasing, therefore it's difficult to determine the amount due to lack of enough information.

But, assuming all other expenses remain constant and no change in cost of goods sold then we can say that an increase in sales by 3.8% would be reflected in before tax income with the same percentage. Keeping in mind this assumption, the projected tax expense for 2014 could be as follows:

Lets first calculate current tax rate as follows;

Tax rate= $9.10 m ÷ $51.2 m× 100

Tax rate= 17.77%

Now, lets incorporate projected increase in before tax income.

Projected income = $51.2 m × 1.038

Projected income = $53.1456 million

Tax expense for 2014 = $53.1456 × 17.77%

Tax expense for 2014 = $9.45 million