Answer:
Given the financial data presented, Builtrite's taxable income can be determined as follows:
Net Sales = $900,000
Cost of Goods Sold = $280,000
Gross Profit = $620,000
Operating Expenses = 25% of Net Sales = $225,000
Operating Income = Gross Profit - Operating Expenses = $395,000
Adding Builtrite's dividend income of $50,000 and deducting common stock dividends of $25,000 results in total non-operating income of $25,000. When this amount is added to Builtrite's operating income of $395,000, it yields a taxable income of $420,000.
To determine Builtrite's tax liability based on this taxable income, we would need to know the applicable tax rate. Assuming a federal tax rate of 21% and state tax rate of 5%, Builtrite's total tax liability would be $98,700.
If we further assume that Builtrite had $30,000 in interest expense, we can calculate the after-tax cost of this expense. Since interest expense is tax-deductible, the amount of taxable income is reduced to $390,000 ($420,000 - $30,000). Using the same tax rates as before, the total tax liability on $390,000 of taxable income is $91,350. Thus, the after-tax cost of $30,000 of interest expense would be $30,000 - $91,350 = -$61,350 (negative value indicates a tax benefit).
Finally, we can calculate Builtrite's new level of retained earnings using the following formula:
Retained Earnings = Beginning Retained Earnings + Net Income - Dividends
Substituting the given values yields:
Retained Earnings = $140,000 + $75,000 - $10,000 - $35,000 = $170,000
Therefore, Builtrite's new level of retained earnings is $170,000.