Question

Dr. Zhivàgo Diagnostics Corp.’s income statement for 20X1 is as follows

Sales	\( 2790000
Cost of goods sold	1790000
Gross profits	\) 1000000
Selling and administrative expenses	302000
Operating profits	\( 698000
Interest Expense	54800
Income before tax	\) 643200
Taxes 30%	192960
Income after tax	$ 450240

b. 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?

Short answer

The income after tax of the company is $394,940, and the profit margin is 12.87%.

Step-by-step solution

Income after tax for the year 20X2:

Sales ( $ 2790000x 110% )	$3,069,000
Cost of goods sold($ 1790000x 120%)	2148000
Gross profits	921000
Selling and administrative expenses	302000
Operating profits	619000
Interest Expense	54800
Income before tax	564200
Taxes 30%	169260
Income after tax	$ 394940

Return Profit margin for the year 20X2

Profit Margin = Net income after tax / sales

= $ 394940 / $ 3069000

= 12.87%