Question

ABC company which is based in the US,sells product X and has reported a revenue of $1,925,000 and a gross income ( profit before tax) of $50,000. answer the questions below .

1. what is the cost of the revenue ?

2. what is the gross profit margin?

3. suppose the company is in the 20% tax bracket,what is the net income?

4.what is the net profit margin

5. compare the gross and net profit margins,what do they tell you? a brief answer

6.if the company sells product x for $150 per unit,in which the variable costs per unit is $90,what is the contribution margin and what is the contribution margin ratio?

7. suppose that the fixed costs in producing product x is $720,000, calculate the breakeven point( in dollars and in units)

8.plot a break-even graph highlighting the break-even point,revenue,total costs,overall variable costs and fixed costs?

note : number 1 - 4 have been answered

Answer 1

Information provided is:-

Revenue = $1,925,000

Gross income (profit before tax) = $50,000

1. Cost of the revenue = Revenue – Gross income = 1,925,000 – 50,000 = $1,875,000
2. Gross profit margin = Gross profit / Revenue * 100

= 50,000 / 1,925,000 * 100 = 2.60% (Approx.)

3. Net income = Gross profit – Income tax

= 50,000 – (50,000 * 20 / 100) = $40,000

4. Net profit margin = Net Profit / Revenue * 100

= 40,000 / 1,925,000 * 100 = 2.08% (Approx.)

5. From the total revenue 2.60% attributable to gross profit margin while 2.08% attributable to net profit margin. This is quite good percentage for net profit margin based on gross profit margin because only one expenses is subtracted from the gross profit to calculate the net profit. But to improve the ratio further company can reduce its COGS or else should make plan to improve its revenue.
6. Selling price (per unit)= $150

Variable expenses (per unit) = $90

Contribution margin (per unit) = 150 – 90 = $60

Contribution margin ratio = Contribution margin / Selling price = 60 / 150 = 0.4

7. Fixed cost = $720,000

Break-even Point (in unit) = Fixed cost / Contribution per unit = 720,000 / 60 = 12,000 units

Break-even Point (in dollars) = 12,000 * 150 = $1,800,000

8.