Question

Dr. Zhivago Diagnostics Corp.'s income statement for 20X1 is as follows:
  

Sales	$	2,710,000
Cost of goods sold		1,850,000
Gross profit	$	860,000
Selling and administrative expense		346,000
Operating profit	$	514,000
Interest expense		58,000
Income before taxes	$	456,000
Taxes (30%)		136,800
Income after taxes	$	319,200

   
a. Compute the profit margin for 20X1. (Input the profit margin as a percent rounded to 2 decimal places.)
  

b. Assume in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Once again, assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2? (Input the profit margin as a percent rounded to 2 decimal places.)

Answer 1

a. Compute the profit margin for 20X1. (Input the profit margin as a percent rounded to 2 decimal places.)

Profit margin 20X1 = Net income / Sales

=319,200/2,710,000

=11.78%

Assume in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Once again, assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?

Sales 2710000*1.10	$2,981,000.00
Cost of goods sold 1850000*1.20	$2,220,000.00
Gross profit	$761,000.00
Selling and administrative expense	$346,000.00
Operating profit	$415,000.00
Interest expense	$58,000.00
Income before taxes	$357,000.00
Taxes (30%)	$107,100.00
Income after taxes	$351,120.00

Profit margin 20X2 = Net income / Sales

$351120/$2981000=11.78%