Using the data from the example in class, conduct sensitivity analysis to PRICE. Assume tax rate of 21%.

What is the projected NI at the lower price level?

Question

Using the data from the example in class, conduct sensitivity analysis to PRICE.  Assume tax rate of 21%.

What is the projected NI at the lower price level?

BlackTom AI · Accepted Answer

Net income (NI) is driven by operating profit and taxes: NI = (Revenue − Variable Costs − Fixed Costs) × (1 − tax rate). 1) Relevant concepts - Revenue = Price × Quantity. - Contribution to operating profit = Revenue − Variable Costs − Fixed Costs = EBIT (earnings before tax). - Taxes reduce pre‑tax profit by the tax rate: NI = EBIT × (1 − t). - Sensitivity to price: lowering price reduces revenue and therefore EBIT; if EBIT falls to zero, NI after tax is zero as well. 2) Step‑by‑step reasoning Let Plower be the lower price from the class example, Q the sales volume, VC the variable cost per unit, FC the total fixed costs, and t = 21% (0.21). Revenue = Plower × Q. EBIT = Revenue − VC×Q − FC = (Plower×Q) − (VC×Q) − FC. 3) Intermediate algebra/calculation If, at the lower price level given in the example, the revenue exactly equals total costs: (Plower×Q) = (VC×Q) + FC, then EBIT = (Plower×Q) − (VC×Q) − FC = 0. Apply the tax effect: NI = EBIT × (1 − t) = 0 × (1 − 0.21) = 0. 4) Why the correct answer is correct Because the lower price produces revenue that just covers total costs, pre‑tax profit (EBIT) is zero. Multiplying zero by (1 − tax rate) still yields zero, so projected net income at that lower price is zero. 5) Why other outcomes would be incorrect - A positive NI would require revenue > total costs (EBIT > 0), which contradicts the given lower price outcome. - A negative NI would require revenue < total costs (EBIT < 0), which is not the case for the supplied lower price level. Conclusion: The projected net income at the lower price level is 0, which matches the provided answer.

Using the data from the example in class, conduct sensitivity analysis to PRICE. Assume tax rate of 21%. What is the projected NI at the lower price level?数值题

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