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	\(698000
Interest Expense	54800
Income before taxes	\)643200
Taxes30%	192960
Income after-tax	$ 450240

Compute the profit margin for 20X1.

Short answer

Profit margin: 4.5%

Step-by-step solution

Profit margin

The profit margin of the company is calculated as a percentage of income divided by revenue. There are 3 types of profit margin: gross profit margin, operating profit margin, and net profit margin. However, the most important and commonly used is the net profit margin - calculated after deducting all expenses, including taxes and interests.

Net profit margins are most used by creditors, investors, and the businesses themselves to evaluate the financial health of the company.

Calculation of Profit margin

Profit margin = Net income after tax/ Sales

= $450240/ $279000= 16.14%