Operating Profit Margin Calculation | CFA Level 1 Exam Preparation

Operating Profit Margin

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Question

The following data are available for a firm for a given year:

Net Sales 21,896 -

Sales & marketing expenses 4,346

Administrative expenses 2,143 -

COGS 10,084 -

Depreciation 967 -

Interest expense 573 -

Tax rate35%

Dividends paid 3,445 -

Preferred Dividends 897 -

Average total equity 37,432 -

Average common equity 26,782 -

Average total liabilities1 8,583

In the above example, the firm's operating profit margin equals ________.

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A

Operating Profit Margin = 21,896 - 10,084 - 4,346 - 2,143 = 5,323. (Earnings before depreciation, interest, and taxes as a % of sales; EBDIT). Therefore,

Operating Profit Margin = 5,323/21,896 = 0.24.

To calculate the firm's operating profit margin, we need to determine its operating profit and then divide it by net sales.

First, let's calculate the operating profit. The formula for operating profit is:

Operating Profit = Net Sales - COGS - Sales & marketing expenses - Administrative expenses - Depreciation - Interest expense

Using the provided data: Net Sales = $21,896 COGS = $10,084 Sales & marketing expenses = $4,346 Administrative expenses = $2,143 Depreciation = $967 Interest expense = $573

Operating Profit = $21,896 - $10,084 - $4,346 - $2,143 - $967 - $573 Operating Profit = $3,783

Next, we calculate the operating profit margin. The formula for operating profit margin is:

Operating Profit Margin = Operating Profit / Net Sales

Operating Profit Margin = $3,783 / $21,896 Operating Profit Margin ≈ 0.173 or 17.3%

Therefore, the firm's operating profit margin is approximately 0.173 or 17.3%. None of the given answer options matches this result. It's possible that there may be an error in the question or the answer choices provided.

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