Question

Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income.

The amount that Ford Motor Company owe in taxes next year without the launch of the new SUV is closest to:

A) $24.0 million
B) $56.0 million
C) $31.5 million
D) $13.5 million

The amount that Ford Motor Company owe in taxes next year with the launch of the new SUV is closest to:

A) $13.5 million
B) $31.5 million
C) $56.0 million
D) $24.0 million

Answer 1

Answer:

(a) Option (A) is correct.

(b) Option (A) is correct.

Explanation:

Given that,

With the new SUV launch,

Generate operating losses = $35 million next year

Without the new SUV,

Expects to earn pre-tax income = $80 million from operations next year

Tax rate on its pre-tax income = 30%

(a) The amount that Ford Motor Company owe in taxes next year without the launch of the new SUV is closest to:

= Expected pre-tax income × Tax rate on its pre-tax income

= $80 Million × 30%

= $24 Million

(b) The amount that Ford Motor Company owe in taxes next year with the launch of the new SUV is closest to:

= ( Expected pre-tax income - operating losses) × Tax rate on its pre-tax income

= ($80 Million - 35 Million) 30%

= $13.5 Million