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You CANNOT include income tax as an expense in the calculation of, ahem, income tax. At what point do you stop?
The same goes for including income tax in determining price: If you can sell a unit for $5 at a cost of $4 and you decide to sell it for $5.35 to account for income tax, well now you have to raise price another $.12 to account for the 35% on the 35 cents, and so on and so on.
Meanwhile your competitor is letting supply and demand determine price (even if it means a price of $4.01) and watching you go out of business.
you can include income tax in calculation of profit, which is the purpose of being in business. You have done it (somewhat) above. you want 1$ profit, so you set your item at $5.54. you make your 1.54 profit, pay 35% and end up with $1. Divide what you want your profit to be by .65 and add it to the cost of the item. yes, I know supply and demand determines price (for the most part)
If supply and demand states that you cannot sell your item for that much, you have to decide a) is $1 profit enough for me to accept this risk or am I willing to lower the price and/or b) I'm going to invest my money elsewhere.
would you just start producing an item not knowing what your net profit will be? Seems crazy, to me.