CHAPTER 16

Tax Effects on Cost-Volume-Profit

Throughout this book, we have disregarded the effect of income taxes on cost-volume-profit analysis. When an organization is at breakeven, this disregard of income taxes is appropriate because the organization is earning no profit and suffering no loss, and therefore incurring no income tax liability. Furthermore, even when an organization is earning a profit, many users of cost-volume-profit analysis are not responsible for the company’s tax issues, tax decisions, and tax effects. They just need to show how a product, department, or idea can be profitable to the firm.

However, when the organization moves away from the breakeven point and begins to earn a profit, some level of management must realistically ...

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