Question

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

Sales $ 2,790,000
Cost of goods sold 1,790,000
Gross profit $ 1,000,000
Selling and administrative expense 302,000
Operating profit $ 698,000
Interest expense 54,800
Income before taxes $ 643,200
Taxes(30%) 192,960
Income after taxes $ 450,240
a. Compute the profit margin for 20X1.
b. Assume that 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. Assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?

Answer 1

The profit margin for 20X1 is 16.14%. For 20X2, with a 10% increase in sales and a 20% increase in cost of goods sold (COGS), income after taxes is $394,940 and the profit margin is 12.87%.

Step-by-step explanation:

To compute the profit margin for Dr. Zhiva Çgo Diagnostics Corp. for 20X1, we need to divide the Income after taxes by Sales and then multiply by 100 to get the percentage:

Profit Margin for 20X1 = (Income after taxes / Sales) × 100 = ($450,240 / $2,790,000) × 100 = 16.14%

For 20X2, assuming sales increase by 10 percent and cost of goods sold (COGS) increases by 20 percent while other expenses remain the same, here's the calculation:

New Sales = $2,790,000 × 1.10 = $3,069,000

New COGS = $1,790,000 × 1.20 = $2,148,000

Gross Profit for 20X2 = New Sales - New COGS = $3,069,000 - $2,148,000 = $921,000

Operating Profit for 20X2 = Gross Profit - Selling and Administrative Expenses = $921,000 - $302,000 = $619,000

Income Before Taxes for 20X2 = Operating Profit - Interest Expense = $619,000 - $54,800 = $564,200

Income After Taxes for 20X2 = Income Before Taxes × (1 - Tax rate) = $564,200 × (1 - 0.30) = $394,940

Profit Margin for 20X2 = (Income after taxes / New Sales) × 100 = ($394,940 / $3,069,000) × 100 = 12.87%