Question

You are given the following information for Ted's Dread Co.: sales = $52,300; costs = $38,500; addition to retained earnings = $3,000; dividends paid = $990; interest expense = $1,450; tax rate = 30 percent. What is the net income?

A. $9,460
B. $11,850
C. $10,850
D. $11,460

Answer 1

The net income for Ted's Dread Co. is $11,460, and the correct option is D.

Step-by-step explanation:

The net income is determined by subtracting the total costs, interest expense, and taxes from the sales revenue. In this scenario, the calculation is as follows:

`\[ \text{Net Income} = \text{Sales} - \text{Costs} - \text{Interest Expense} - (\text{Tax Rate} * \text{Sales}) \]`

`\[ \text{Net Income} = \$52,300 - \$38,500 - \$1,450 - (0.30 * \$52,300) \]`

`\[ \text{Net Income} = \$52,300 - \$38,500 - \$1,450 - \$15,690 \]`

`\[ \text{Net Income} = \$11,460 \]`

Sales of $52,300 represent the total revenue generated. Subtracting the cost of goods sold ($38,500), interest expense ($1,450), and taxes (calculated at a 30% tax rate on sales) results in a net income of $11,460.

The addition to retained earnings and dividends paid are not directly factored into the net income calculation. Instead, they influence the distribution of profits after net income has been determined. The net income is a key financial metric that reflects the company's profitability.

In summary, the net income for Ted's Dread Co. is $11,460, reflecting the profit earned after accounting for all relevant expenses and taxes. This metric is crucial for assessing the financial health and performance of the company.