Calumet Cabinets Corporation had sales of $3.2 million in 2007. Its cost of goods sold was $1.4 million, and it had $1.3 million in selling, general, and administrative expenses. It paid interest
Of $50,000 and dividends to its shareholders of $10,000. For simplicity, assume a flat tax rate of
40%. The firm's operating profit in 2007 was

Question

Quizplus · Accepted Answer

Operating profit = Sales - Cost of goods sold - Selling, general and administrative expenses
= $3.2 million - $1.4 million - $1.3 million
= $0.5 million
Net profit = Operating profit - Interest - Dividends
= $0.5 million - $50,000 - $10,000
= $0.4 million
Taxable income = Net profit
= $0.4 million
Tax payable = 40% of taxable income
= 0.4 million * 0.4
= $0.16 million
So, the after-tax profit is:
After-tax profit = Net profit - Tax payable
= $0.4 million - $0.16 million
= $0.24 million
Therefore, the operating profit in 2007 was $0.5 million. Operating profit = Sales - Cost of goods sold - Selling, general, and administrative expenses = $3.2 million - $1.4 million - $1.3 million = $0.5 million. 
The firm's profit before interest and taxes (PBIT) is $0.5 million + $50,000 = $0.55 million. 
After deducting the tax at 40%, the firm's net profit is $0.55 million × (1 - 0.4) = $0.33 million. 
Since the dividend paid is less than $0.33 million, the firm has a net income of $0.33 million, and its operating profit in 2007 was $0.5 million. Therefore, the correct answer is C.

Calumet Cabinets Corporation Had Sales of $3