Acompany has a 40% gross margin, general and administrative expenses of $50, interest expense of $20, and net income of $70 for the year just ended. if the corporate tax

rate is 30%, the level of sales revenue for the year just ended was

a. $425

b. $350

c. $170

d. $255

Answer is A

Explanation:

Remember Gross Margin = Gross Profit /Sales Revenue

We already know that Gross Margin = 0.4

We assume sales revenue as the unknown value (S)

Using the relationship above: Gross Profit (GP) = 0.4S

We know that Profit Before Tax = Gross Profit - General & Admin Expenses - Interest Expense

Substitute the values in the equation above.

Profit Before Tax (PBT) = 0.4S - 50 - 20

                                      = 0.4S - 70

To calculate the Tax we multiply the Tax rate (30%) by the PBT

Tax = (0.3) x (0.4S -70)

      = 0.12S - 21

We know that Net Income = PBT - Tax

We now substitute the values:

70 = 0.4S - 70 - (0.12S - 21)

Solving the equation for S results in the value of Sales Revenue equaling $425.

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