[alisonfrankie]

:confused: OK... Here is the question, with my answer... it doesn't seem right

Find the net profit if margin earnings before interest and taxes is $20,000, net income is $10,000, sales are $50,000, and total assets are $100,000.

My answer:

Net Profit Margin = Net income / net sales
= 10,000 / 50,000
= 20%
= 10,000 * 20%
Net Profit = $2,000

Is this correct?

Thank you

[rdrewd]

No, $50,000 x 20% = $10,000. But I'm not sure what you want to do with that 20% number. If you managed to double your sales, would the 20% still apply? So doubled sales would double the profits? Maybe, but probably not.

You mentioned assets, which makes me wonder if you are considering "depreciation" on those assets as part of the expenses.

Typically there are a bunch of fixed expenses that don't change over a wide range of sales levels. At some point in extrapolating to higher sales, you have to factor in needing perhaps another sales person, more help on the loading dock, maybe more loading docks, more production capacity, overtime pay and so forth.

May be more interesting to figure out what sales volume you needed to cover your expenses and what the profitability is on the units sold beyond that. How profitable was the last one that you sold? To figure that, you need to know the selling price and the cost of the goods sold. Cost of the units you are selling is likely to be a bit more of an essay question than you had in mind, but worth figuring out.

You need an accountant and you need to be able to tell your accountant what it is you want to know from the data. There's lots of ways to slice the data. Look at the movie stars and recording artists who had a contract for a percentage of the profits and found that when the studio accountants finished figuring things, there were little or no profits.

[morgaine300]

The 20% thing doesn't make any sense. Yes, that's the profit margin. But net profit is the same as net income. What is your book calling "net profit"? It doesn't make sense to take 20% of the net income. That has no meaning.

Are you sure the problem is not asking for net profit margin? i.e. your answer is just the 20%? The question otherwise does not make any sense.