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

Question

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

Sales $ 2,950,000

Cost of goods sold 2,180,000

Gross profit $ 770,000

Selling and administrative expense 393,000

Operating profit $ 377,000

Interest expense 52,500

Income before taxes $ 324,500

Taxes (30%) 97,350

Income after taxes $ 227,150

a. Compute the profit margin for 20X1 (Input the profit margin as a percent rounded to 2 decimal places.)

Profit Margin ______%

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? (Input the profit margin as a percent rounded to 2 decimal places.)

20X2

Income after taxes _________

Profit margin __________%

Explanation / Answer

a)Profit margin= net income/sales
=227150/2950000
=7.70%
b)sales=2950000*1.1=3245000
cogs=2180000*1.2=2616000
SG&A=393000
interst exp=52500
income before taxes=3245000-2616000-393000-52500=183500
tax=30%*183500=55050
incoem after taxes=183500-55050=128450
Net profit (%)=128450/3245000=3.96%

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