Question

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes are equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 34%?a. â2.43%.b. 1.56%.c. 3.33%.d. â5.29%.e. â6.11%.

Answer 1

Answer:

Net Profit margin = 0.015637 or 1.5637% rounded off to 1.56%

Option b is the correct answer

Explanation:

The profit margin which is also known as the Net Profit margin the amount of net profit after tax expressed as a percentage of the sales revenue. To calculate the net profit margin, we must first calculate the net profit after tax. Net Profit after tax can be calculated as follows,

We know that sales revenue is $137000 and Earnings before Interest and taxes (EBIT) are 5.8% of sales revenue, then the EBIT is:

EBIT = 137000 * 0.058 = $7946

If we deduct the interest expense from EBIT, we will get Net Profit before tax.

Net profit before tax = 7946 - 4700 = $3246

The tax expense is = 3246 * 0.34 = $1103.64

So, Net Profit after tax = 3246 - 1103.64 = $2142.36

Net profit margin = 2142.36 / 137000

Net Profit margin = 0.015637 or 1.5637% rounded off to 1.56%