A company has income before taxes of $100,000. Net sales are $400,000 and gross profit is $300,000. What is the profit margin, assuming the company has a 40% tax rate?

Alright. Let's try this one here. A company has income before taxes of a 100,000. Net sales are 400,000 and gross profit is 300,000. What is the profit margin assuming the company has a 40% tax rate? So it's asking us to find the profit margin, right? But how do we find profit margin? Net income divided by net sales. They didn't tell us what net income is here, so we're gonna have to calculate it somewhere, right? Here we have our net sales, so we know our denominator right there. But how do we calculate net income with the information they gave us? They told us what gross profit is, but gross profit is just that sales minus COGS and then we have to take out all our operating expenses. So it doesn't really tell us much here. This gross profit is actually just extraneous information. We can't really get to net income from there. But what else did they tell us? They told us income before taxes. This is the last subtotal before we get to net income. The last expense that we show is our income tax expense. So we show our income before taxes, we calculate our taxes and then what's left is our net income. Alright? So that's how we're gonna get to net income here. We had a 100,000 in income before taxes and we gotta take out the taxes, right? We had to pay some taxes and that was 40% of that. So 40% of that was taxes, that means we paid 40,000 in taxes. Right? So that's what we have to take out from our income before taxes, subtract the taxes and then we're left with net income. So let's go ahead and do that. This was our income before taxes, a 100,000 minus this 40,000 in taxes. Right? Those were the taxes. And what are we left with? We're left with 60,000 and that is our net income right there. Okay. So our net income is gonna be what's left over after we pay taxes and now we're ready to go ahead and solve this problem. So 60,000 is our numerator, right? When we do our profit margin, our numerator is net income and we divide it by net sales, our sales revenue. So divided by 400,000 and what does that give us? 60,000 divided by 400,000, whoops, 400,000, right? In net sales, 60,000 divided by 400,000. Well, that comes out to 0.15 which is 15%. So 15%. Remember, when we analyze profit margin, what does this tell us? It means for every dollar of sales that we bring in. So we bring in a dollar in revenue, well, there's gonna be 15¢ left at the end of the day, right? 15% of that dollar is gonna be our net income. Cool? So the answer here, the profit margin is 15% in this case. Cool. Let's go ahead and move on to the next video.

Struggling with Managerial Accounting?

A company has income before taxes of \$100,000. Net sales are \$400,000 and gross profit is \$300,000. What is the profit margin, assuming the company has a 40% tax rate?

Watch next