"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

1. Income after taxes in 20X2 = $249900

2a. Gross Profit Margin =  25.5%

2b. Operating Profit Margin = 14%

2c. Net Profit Margin = 8.4%

Explanation:

1. The calculation and method to obtain the income after taxes in 20X2 has been provided in the attached table. Please refer it.

2. The profit margin can be calculated at 3 different levels on an income statement:

a. This defines profit as all the income that remains after accounting for all the costs of goods sold.

Gross Profit Margin = (Net sales - COSG) / Net Sales x 100

= (2981000 - 2220000) / 2981000 x 100 = 25.5%

b. This is a step further from gross profit margin, since it takes into account expenses such as selling and administration and other sales expenses necessary for the day to day running of the business.

Operating Profit Margin = Operating Income / Revenue x 100

= (415000 / 2981000) x 100 = 14%

c. This reflects the total amount left over after accounting for all expenses and income streams. Along with cost of goods sold and operating expenses, it also includes taxes and payments on debts.

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

(249900 / 2981000) x 100 = 8.4%

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1. c

2. b

3. a

4. c

5. a

6. b

7. c

8. c

9.b

10. d

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