Dr Skelly Diagnostics Corp Income Statements For 2013 Are As
Dr Skelly Diagnostics Corp Income Statements For 2013 Are As Follows
Dr. Skelly Diagnostics Corp. income statements for 2013 are as follows: Sales: $2,790,000; Cost of goods sold: $1,790,000; Gross profit: $1,000,000; Selling and administrative expense: $302,000; Operating profit: $698,000; Interest expense: $54,800; Income before taxes: $643,200; Taxes (30%): $192,960; Income after taxes: $450,240.
a. Compute the profit margin for 2013.
b. Assume in 2014, 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 2014?
Paper For Above instruction
Profitability analysis is essential for understanding a company's financial health. The profit margin, in particular, is a key indicator that reflects how efficiently a company manages its revenues and expenses to generate profit. This paper examines the profit margin for Dr. Skelly Diagnostics Corp. for 2013 and projects the same for 2014 based on specified changes in sales and costs.
Profit Margin for 2013
The profit margin is calculated as net income divided by total sales, expressed as a percentage. It provides insight into how much profit is generated from each dollar of sales. For 2013, the net income after taxes was $450,240, with total sales of $2,790,000. The profit margin is calculated as:
Profit Margin (2013) = (Net Income / Sales) x 100
= ($450,240 / $2,790,000) x 100 ≈ 16.13%
This indicates that Dr. Skelly Diagnostics earned approximately 16.13 cents for every dollar of sales in 2013, reflecting a moderate level of profitability.
Projection for 2014
In 2014, sales are projected to increase by 10%, and the cost of goods sold (COGS) is to increase by 20%. The other expenses, including selling and administrative expenses, are assumed to remain constant. The impact of these changes on the company's profitability can be analyzed step-by-step.
Projected Sales and COGS for 2014
Sales in 2014 will be:
Sales 2014 = Sales 2013 x (1 + 10%)
= $2,790,000 x 1.10 = $3,069,000
COGS in 2014 will be:
COGS 2014 = COGS 2013 x (1 + 20%)
= $1,790,000 x 1.20 = $2,148,000
Gross Profit and Operating Expenses
Gross profit for 2014 is then:
Gross Profit 2014 = Sales 2014 - COGS 2014
= $3,069,000 - $2,148,000 = $921,000
Operating expenses, including selling and administrative expenses, are assumed to stay at $302,000.
Operating Profit and Income Before Taxes
Operating profit will be:
Operating Profit 2014 = Gross Profit 2014 - Operating Expenses
= $921,000 - $302,000 = $619,000
Interest expense remains at $54,800, so income before taxes is:
Income Before Taxes 2014 = Operating Profit 2014 - Interest Expense
= $619,000 - $54,800 = $564,200
Tax Calculation and Net Income
The tax rate remains at 30%, so taxes are:
Taxes 2014 = Income Before Taxes x 30%
= $564,200 x 0.30 = $169,260
Net income after taxes will be:
Net Income 2014 = Income Before Taxes - Taxes
= $564,200 - $169,260 = $394,940
Profit Margin for 2014
The profit margin is then calculated as:
Profit Margin 2014 = (Net Income / Sales) x 100
= ($394,940 / $3,069,000) x 100 ≈ 12.87%
Thus, the project's net income for 2014 is approximately $394,940, and the profit margin declines to approximately 12.87% due to increased costs relative to sales, indicating reduced profitability.
Conclusion
The analysis demonstrates that while sales increases can initially seem beneficial, rising costs—particularly a 20% increase in COGS—can significantly compress profit margins. The decline from roughly 16.13% in 2013 to 12.87% in 2014 underscores the importance of cost control alongside revenue growth. For managers, maintaining a balance between sales expansion and cost management is crucial for sustaining profitability.
References
- Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.