Question

Refer to the following selected financial information from Shakley's Incorporated. Compute the company's profit margin for Year 2 Net sales Cost of goods sold Interest expense Net income before tax Net income after tax Total assets Total liabilities Total equity Year 2 Year 1 $ 480,500 $426,650 276,700 250,520 10,100 11,100 67,650 53,080 46,450 40,300 317,900 290,400 179,400 167,700 138,500 122,700 Multiple Choice Next > S Proy 20 d 30

Answer 1

There are mainly four types of profit margin. This are gross profit margin, operating profit margin, pre tax profit margin and net profit margin.

But generally profit margin stand as net profit margin.

So, net profit margin or profit margin = [net income after tax / net revenue] X 100 %

Net profit margin or profit margin for year 2 = [$ 46,450 / $ 480,500] X 100 %= 9.67 % or 9.7%

Following are the other profit margin ratio for year 2 :-

Gross profit margin = [gross profit / net revenue ] X 100 %

Gross profit = revenue - COGS

gross profit = $ 480,500 - $ 276,700 = $ 203,800

Gross profit margin for year 2 =[ $ 203,800/ $ 480,500] X 100 % =42.41% or 42.4%

Operating profit margin = [operating profit / net revenue ] X 100 %

Operating profit = gross profit - operating expenses

Here, there is no operating expenses ,because interest expenses is considered as non operating expenses .So, operating profit is equal to gross profit for year 2. So, operating profit margin ratio is same as gross profit ratio i.e 42.41% or 42.4% for year 2.

Pre tax margin = [net income before tax/ net revenue ] X 100 %

Pre tax margin for year 2 = [ $ 67,650/ $ 480,500] X 100 % = 14.08% or.14.1%

Conclusion : If you only consider your three options, then you can choose option number A.( i.e 14.1%)