Question

Please answer the 3 parts. Don't copy and paste. No handwritten please.

ABC Stores has a net sales of $180,000 in 2014. The cost of goods sold was $85,000, operating expenses (excluding depreciation) were $35,000, interest expenses were $5,000 and depreciation expense was $20,000. The firm's tax rate is 35 percent. a. What is the company's earnings before interest and taxes (EBIT) for 2014? b. What is the net income? c. Suggest a change in the activities of the firm that would lead to an increase in gross margin of 20%, e.g. "do X that would change item Y in the income statement, which would then increase gross margin by 20%."

Answer 1

a.
Calculation of EBIT for 2014
Net sales	$180,000
Less: Cost of goods sold	$85,000
Gross margin	$95,000
Operating expenses	-$35,000
Depreciation	-$20,000
Earnings before interest and tax (EBIT)	$40,000
b.
Calculation of net income
EBIT	$40,000
Interest expense	-$5,000
Earnings before tax	$35,000
Taxes @ 35%	-$12,250
Net income	$22,750
c.
Increase in 20% gross margin would require gross margin to increase from $95,000 to $114,000 (95,000*1.20)
Thus, company should increase its sales by $19,000 (114,000-95,000) in order to increase in gross margin of 20%.