Math Problem Statement

The​ S&H Construction Company expects to have total sales next year totaling $15,200,000. In​ addition, the firm pays taxes at 35 percent and will owe $304,000 in interest expense. Based on last​ year's operations the​ firm's management predicts that its cost of goods sold will be 57 percent of sales and operating expenses will total 25 percent.

Solution

To calculate the net income for S&H Construction Company, we'll need to break down the different components based on the information provided. Here's how we proceed:

1. Calculate Gross Profit:

The firm's cost of goods sold (COGS) is 57% of total sales.

COGS=0.57×15,200,000=8,664,000\text{COGS} = 0.57 \times 15,200,000 = 8,664,000

Next, calculate the Gross Profit by subtracting the COGS from total sales:

Gross Profit=15,200,0008,664,000=6,536,000\text{Gross Profit} = 15,200,000 - 8,664,000 = 6,536,000

2. Calculate Operating Income:

The firm's operating expenses are 25% of total sales.

Operating Expenses=0.25×15,200,000=3,800,000\text{Operating Expenses} = 0.25 \times 15,200,000 = 3,800,000

Now, calculate the Operating Income (also known as EBIT, Earnings Before Interest and Taxes):

Operating Income (EBIT)=Gross ProfitOperating Expenses\text{Operating Income (EBIT)} = \text{Gross Profit} - \text{Operating Expenses} Operating Income=6,536,0003,800,000=2,736,000\text{Operating Income} = 6,536,000 - 3,800,000 = 2,736,000

3. Calculate Earnings Before Taxes (EBT):

To get Earnings Before Taxes (EBT), subtract the interest expense from the operating income:

EBT=Operating IncomeInterest Expense\text{EBT} = \text{Operating Income} - \text{Interest Expense} EBT=2,736,000304,000=2,432,000\text{EBT} = 2,736,000 - 304,000 = 2,432,000

4. Calculate Net Income:

Now, apply the tax rate (35%) to the EBT to get the Net Income:

Taxes=0.35×2,432,000=851,200\text{Taxes} = 0.35 \times 2,432,000 = 851,200

Net Income=EBTTaxes\text{Net Income} = \text{EBT} - \text{Taxes} Net Income=2,432,000851,200=1,580,800\text{Net Income} = 2,432,000 - 851,200 = 1,580,800

Final Result:

The Net Income for S&H Construction Company is $1,580,800.

Would you like further explanation or have any questions on this?

Here are five related questions for further practice:

  1. How would changes in the tax rate affect the net income?
  2. What if operating expenses increased by 5%? How would net income be impacted?
  3. How would you calculate the company's profit margin based on the net income and total sales?
  4. What if the company paid no interest expense? How would that affect the net income?
  5. How would changes in COGS affect the overall profitability?

Tip: Tracking different expense categories separately (like interest and operating expenses) is important in understanding a firm's financial health.

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Math Problem Analysis

Mathematical Concepts

Profit Calculation
Income Tax
Percentage Calculations

Formulas

COGS = 0.57 × Total Sales
Operating Expenses = 0.25 × Total Sales
Gross Profit = Total Sales - COGS
Operating Income (EBIT) = Gross Profit - Operating Expenses
EBT = Operating Income - Interest Expense
Net Income = EBT - (Tax Rate × EBT)

Theorems

Basic Financial Accounting Formulas

Suitable Grade Level

Grades 10-12