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XYZ Company, a 'for-profit' business, had revenues of $12 million in 2016. Expenses other than depreciation...

XYZ Company, a 'for-profit' business, had revenues of $12 million in 2016. Expenses other than depreciation totaled 75 percent of revenues. XYZ Company, must pay taxes at a rate of 40 percent of pretax (operating) income. All revenues were collected in cash during the year, and all expenses other than depreciation were paid in cash. Depreciation originally was $1.5 million; however, a change in the depreciation schedule (still within GAAP) has now made the depreciation expense DOUBLE. Based on this change in depreciation expense, what would XYZ's cash flow now be? Based on this change in depreciation expense, what would XYZ's profit margin be?

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Answer #1

Profit Margin

Profit Margin is calculated by using the following formula

Profit Margin = (Net Income / Total Revenue) x 100

Total Revenue = $12 Million

Expenses other than Depreciation = $9 Million [$12 Million x 75%]

Depreciation Expenses = $3 Million [It is mentioned that the Depreciation Expense is doubled due to the change in the depreciation schedule]

Net Income = (Total Revenue – Expenses other than Depreciation – Depreciation Expenses) x (1 – Tax Rate)

= ($12 Million - $9 Million - $3 Million) x (1 – 0.40)

= $0 Million

Therefore, the Profit Margin = (Net Income / Total Revenue) x 100

= ($0 Million / $12 Million) x 100

= 0%

“Hence, the XYZ's Profit Margin would be 0%”

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