Thomsonetics, Inc., a rapidly growing early stage technology company, had the pretax income noted below for calendar years 2010-2012. The firm was subject to corporate taxes consistent with the rates shown in Table 2.6 of the text.

Year Pretax Income

2010 ............... $ 87,000

2011 ................ $312,000

2012 ................ $760,000

a. Calculate Thomsonetics’ tax liability for each year 2010, 2011, and 2012.

b. What was the firm’s average tax rate in each year?

c. What was the firm’s marginal tax rate in each year?

d. If in addition to its ordinary pretax income, Thomsonetics realized a capital gain of $80,000 during calendar year 2011, what effect would this have on its tax liability, average tax rate, and marginal tax rate in 2011?

e. Which tax rate – average or marginal – should Thomsonetics use in decision-making? Why?