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Chapter 2: Q6BP_a (page 78)

Dr. Zhivàgo Diagnostics Corp.’s income statement for 20X1 is as follows:

Sales\( 2790000
Cost of goods sold1790000
Gross Profits\)1000000
Selling and administrative expenses302000
Operating profits\(698000
Interest Expense54800
Income before taxes\)643200
Taxes30%192960
Income after-tax$ 450240

Compute the profit margin for 20X1.

Short Answer

Expert verified

Profit margin: 4.5%

Step by step solution

01

Profit margin

The profit margin of the company is calculated as a percentage of income divided by revenue. There are 3 types of profit margin: gross profit margin, operating profit margin, and net profit margin. However, the most important and commonly used is the net profit margin - calculated after deducting all expenses, including taxes and interests.

Net profit margins are most used by creditors, investors, and the businesses themselves to evaluate the financial health of the company.

02

Calculation of Profit margin

Profit margin = Net income after tax/ Sales

= $450240/ $279000= 16.14%

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Most popular questions from this chapter

Why is trend analysis helpful in analyzing ratios?

The Haines Corp. shows the following financial data for 20X1 and 20X2:

20X1

20X2

Sales

\(3,230,000

\)3,370,000

Cost of goods sold

2,130,000

2,850,000

Gross profits

\(1,100,000

\)520,000

Selling and administrative expenses

298,000

227,000

Operating profits

\(802,000

\)293,000

Interest expense

47,200

51,600

Income before taxes

\(754,800

\)241,400

Taxes (35%)

264,180

84,490

Income after tax

\(490,620

\)156,910

For each year, compute the following and indicate whether it is increasing or

decreasing profitability in 20X2 as indicated by the ratio:

a. Cost of goods sold to sales.

Stilley Corporation had earnings after taxes of \(436,000 in 20X2 with 200,000 shares outstanding. The stock price was \)42.00. In 20X3, earnings after taxes declined to \(206,000 with the same 200,000 shares outstanding. The stock price declined to \)27.80.

a. Compute earnings per share and the P/E ratio for 20X2.

b. Compute earnings per share and the P/E ratio for 20X3.

c. Give a general explanation of why the P/E changed. You might want to

consult the text to explain this surprising result.

Given the following information, prepare an income statement for Jonas Brothers Cough Drops.

Selling and administrative expenses

$328,000

Depreciation expenses

195,000

Sales

1,660,000

Interest expenses

129,000

Cost of goods sold

560,000

Taxes

171,000

Low Carb Diet Supplement Inc. has two divisions. Division A has a profit of\(156,000 on sales of \)2,010,000. Division B is able to make only \(28,800 onsales of \)329,000. Based on the profit margins (returns on sales), which divisionis superior?
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