For a firm facing a marginal income tax rate of 30%, what is the after-tax cash flow effect of: (a) a $2,600 increase in contribution margin during the year, and (b) a $1,000 increase in cash operating expenses?

(a) Effect on after-tax flow to contribution margin:

(b) Effect on after-tax cash flow to cash operating Expenses:

(a) $1,820 (Increase)

(b) $700 (Decrease)

Given a marginal income-tax rate of 30%:

a) The after-tax cash effect of a $2,600 increase in cash contribution margin

= increase in pre-tax cash operating income × (1 - t)
= $2,600 × (1 - 0.30)
= $1,820 increase


b) The after-tax cash effect of a $1,000 increase in cash operating expenses

= increase in pre-tax cash expense × (1 - t)
= $1,000 × (1 - 0.30)
= $700 decrease