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Question #15 See the explanation below to work the problem. XYZ Company, a 'for-profit' business, had...

Question #15

See the explanation below to work the problem.

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, now the company has decided to be more

conservative in its depreciation of its capital assets. XYZ now has $750,000 in depreciation expense

instead of $1.5 million.Based on this change in depreciation expense, what would XYZ's total profit margin?

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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

Net Income = [Revenue – Operating Expenses – Depreciation] x (1 – Tax Rate)

= [$12 Million – ($12 Million x 75%) - $0.75 Million] x (1 – 0.40)

= [$12 Million – $9 Million - $0.75 Million] x 0.60

= $2.25 Million x 0.60

= $1.35 Million

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

= ($1.35 Million / $12 Million) x 100

= 11.25%

“Hence, the XYZ's Total Profit Margin = 11.25%”

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