Question

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

Sales	$	2,790,000
Cost of goods sold		1,550,000
Gross profit	$	1,240,000
Selling and administrative expense		306,000
Operating profit	$	934,000
Interest expense		54,400
Income before taxes	$	879,600
Taxes (30%)		263,880
Income after taxes	$	615,720

a. Compute the profit margin for 20X1. I have 22.06 which is correct

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?   I got 50,556 and 16.47 both are wrong

Answer 1

(a)- Profit margin for 20X1

Profit margin for 20X1 = (Income after taxes / Sales) x 100

= ($615,720 / $27,90,000) x 100

= 22.07%

(b)- Income after taxes and the profit margin for 20X2

Sales [$27,90,000 x 110%]	$	30,69,000
Cost of goods sold [$15,50,000 x 120%]		18,60,000
Gross profit	$	12,09,000
Selling and administrative expense		3,06,000
Operating profit	$	9,03,000
Interest expense		54,400
Income before taxes	$	8,48,600
Taxes (30%)		2,54,580
Income after taxes	$	5,94,020

Income after taxes for 20X2 = $594,020

Profit margin for 20X2

Profit margin for 20X2 = (Income after taxes / Sales) x 100

= ($594,020 / $30,69,000) x 100

= 19.36%