need completed – Agribusiness Management 640
Assignment #3
Tax Problem

Jack Smith and John Doe are in the ink pen business, producing ink pens with full- color photos of scantily clad individuals on the sides of

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Assignment #3
Tax Problem

Jack Smith and John Doe are in the ink pen business, producing ink pens with full- color photos of scantily clad individuals on the sides of the pens. They sell them to frustrated college students during finals week. Their variable cost is \$1.00 per pen – that is the additional out of pocket cost for each pen produced (including material and labor). Their fixed cost will be \$5,000 per year. They plan to sell the pens for \$3.50, and they think they can sell 24,000 pens this year.

The business has its ups and downs, but things generally are going well. Yet, they worry a lot that the photos on the pens may distract the operator and result in a personal injury and law suit. Consequently, they are anxious to incorporate to protect their investment from liability.

Each of them would own 50% of the stock and work for the corporation. Answer the following questions using the following assumptions:

The tax rate for individuals:
(1) 15% up to \$10,000 plus
(2) 30% for profits above \$10,000

The tax rate for corporations:
(1) 25% up to \$25,000 plus
(2) 50% for profits above \$25,000

Corporation pays salary of \$10,000 to each shareholder for labor and management input. (None for partnership)

Average cost per year for Ared tape@ required of corporation is \$300 in addition to costs specified for the partnership.

All corporate profits are paid out as dividends.

Assume all other factors have no effect on the decision.

Compute the following:
The partnership=s net income before withdrawals of salary, profits shares, etc.
The corporation=s taxable income.
Federal taxes to be paid by the corporation.
The profit share of each individual in the partnership.
The disposable (after tax) income of each individual in the partnership.
The disposable (after tax) income of each individual in the corporation.

II Based on the above calculations, explain if you think the partnership…

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