Question

A stationery company plans to launch a new type of indelible ink pen. Advertising for the new product will be heavy and will cost the company $8 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes? It will increase taxes by $8 million. It will increase taxes by $2.8 million. It will have no effect on taxes. It will reduce taxes by $2.8 million.

Answer 1

Answer:  It will reduce taxes by $2.8 million.

Explanation:

Expenses are tax deductible which means that the advertising expense will reduce tax by 35% of it's value.

= 8,000,000 * 35%

= $2,800,000

Expenses of $8,000,000 will reduce pre-tax profit by the same amount which would lead to taxes being $2,800,000 lower.