Answer:
Crain Company's total taxes would decrease by $64,740
Explanation:
the income statement for the parent company:
total revenue $2,490,000
- COGS ($1,490,000)
<u>- S&A costs ($390,000)</u>
EBIT $610,000
<u>- taxes ($201,300)</u>
net income $408,700
the income statement for the subsidiary:
total revenue $3,490,000
- COGS ($2,490,000)
<u>- S&A costs ($199,000)</u>
EBIT $801,000
<u>- taxes ($368,460)</u>
net income $432,540
total taxes paid = $201,300 + $368,460 = $569,760
if the parent company increases the selling price by 20%
the income statement for the parent company:
total revenue $2,988,000
- COGS ($1,490,000)
<u>- S&A costs ($390,000)</u>
EBIT $1,108,000
<u>- taxes ($365,640)</u>
net income $742,360
the income statement for the subsidiary:
total revenue $3,490,000
- COGS ($2,988,000)
<u>- S&A costs ($199,000)</u>
EBIT $303,000
<u>- taxes ($139,380)</u>
net income $163,620
total taxes paid = $365,640 + $139,380 = $505,020
the parent company's total taxes would decrease by = $569,760 - 505,020 = $64,740
