A firm reports a net profit margin of 10% on sales of $3 million when ignoring the effects of financing.If taxes are $200,000, how much is EBIT (Operating Income)? (Use the value in dollars)
A)$100,000
B)$300,000
C)$500,000
D)$800,000

Question

Quizplus · Accepted Answer

We can start by using the formula:

Net Profit Margin = Net Profit / Sales

And rearrange it to solve for Net Profit:

Net Profit = Net Profit Margin x Sales

Plugging in the numbers, we get:

Net Profit = 0.10 x $3,000,000 = $300,000

However, this net profit includes the effects of financing (i.e. interest expenses and income). To find EBIT (Operating Income), we need to add back interest expenses (since taxes are given), which we don't have information on.

Therefore, the closest answer is C) $500,000, which is the only option that's higher than $300,000. EBIT (Operating Income) will be higher than net profit because it excludes interest expenses.

A Firm Reports a Net Profit Margin of 10% on Sales