Calculate retention ratio given the following information: cash dividends paid = $4,200; sales = $80,000; cost of goods sold = $30,000; selling and administrative expenses = $8,000; interest expense = $2,000; tax rate = 30%.

Question

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The retention ratio is calculated as the portion of net income that is retained in the business rather than paid out as dividends. First, calculate net income: Sales ($80,000) - Cost of Goods Sold ($30,000) - Selling and Administrative Expenses ($8,000) - Interest Expense ($2,000) = $40,000 before tax. After applying the tax rate (30%), the net income is $40,000 - ($40,000 * 30%) = $28,000. The amount of net income not paid out as dividends is $28,000 - $4,200 (cash dividends paid) = $23,800. The retention ratio is then $23,800 / $28,000 = 0.85, or 85%.

Calculate Retention Ratio Given the Following Information: Cash Dividends Paid