Question

Emily Lim owns and runs an ice cream parlor in San Diego. Last year, she had sales of $490,000 and an average tax rate of 32%. She spent $49,000 on ingredients, $24,500 on utilities, and $88,200 to rent the premises. Emily has a few employees and paid them $98,000 in wages in total. She also paid herself a salary of $73,500 and spent $49,000 to pay for employee benefits. A few years ago, Emily borrowed money to buy the ice making equipment. Last year, she paid $24,500 in interest on that loan. Depreciation for the equipment was $14,700.
Required:
a. What was operating income (EBIT) for the year?
b. What was net income for the year?

Answer 1

Answer:

1). EBIT = Sales - Expenses - Depreciation

= $490,000 -($49,000 - $24,500 - $73,500 - $98,000 - $73,500 - $49,000) - $14,700

= $490,000 - $367,500 - $14,700

= $107,800

2. Net Income = [EBIT - Interest] x [1 - t]

= ($107,800 - $24,500) *(1 - 32%)

= $83,300 * 0.68

= $56,644