Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrative expenses are $500,000 and its research and development is $1 million. It has annual depreciation charges of $1 million and a tax rate of 35%.
Please explain why certain factors are used to calculate net profit margin
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In computing an Income Statement, there are factors to be considered to measure the company's profitability, this will include the four critical factors in the company's operations - gross, operating , pretax and after tax, depending in the requirement ask by the one who will view the income statement. It is either for the internal or external purposes, for the internal purposes legality of the formatting of the income statement is not that strictly followed while the other should follow the standard procedures in preparation of the Income statement.
In order for the investor to understand the income and expenses components of the income statement, he or she must know the factors or the account to be computed. In this way, he or she will only appreciate the company's profitability in a given accounting period. Therefore, the management efficiency is measured is showed in the Income Statement
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I am aware that the formula for Net Profit Margin is Net Income/Sales. Yet am told that you are supposed to multiply selling and administrative expenses by the tax rate then divide by total sales. Yet am having a difficult time to understand how the tax and the expenses would be related to finding the Net Profit Margin. Typically I would look at the income statement and then put in the numbers. But the question here is giving few information.
Net Profit can be derived in deducting all the expenses of the company, Tax is considered as expense so it is much related and very vital in computing the net profit margin. Though income tax is not yet paid within the period but still estimate formulation is very important to arrived the net profit margin of the company within the given period of time.
Sep 15th, 2015
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