In 2014, Timmers, Inc. (a retail clothing company) sold 102,300 units of its product at an average price of
$100.00 per unit. The company reported estimated returns and allowances in 2014 of 1.5 percent of gross
revenue. Timmers actually purchased 109,500 units of its product from its manufacturer in 2014 at an average
cost of $75.00 per unit. Timmers began 2014 with 8,000 units of its product in inventory (carried at an average
cost of $75.00 per unit). Operating expenses (excluding depreciation) for Timmers, Inc. in 2014 were
$750,000 and depreciation expense was $250,000. Timmers had $3,000,000 in debt outstanding throughout
all of 2014. This debt carried an average interest rate of 7.0 percent. Finally, Timmers’ tax rate was 30 percent.
Timmers’ fiscal year runs from January 1 through December 31. Given this information, compute net income
for Timmers for 2014.
To compute net income for Timmers in 2014, we need to calculate the following components:
1. Gross Revenue:
Gross Revenue = Number of units sold * Average selling price per unit
Gross Revenue = 102,300 units * $100.00 per unit
Gross Revenue = $10,230,000
2. Returns and Allowances:
Returns and Allowances = Gross Revenue * Estimated returns and allowances percentage
Returns and Allowances = $10,230,000 * 1.5%
Returns and Allowances = $153,450
3. Net Sales:
Net Sales = Gross Revenue - Returns and Allowances
Net Sales = $10,230,000 - $153,450
Net Sales = $10,076,550
4. Cost of Goods Sold (COGS):
COGS = Number of units purchased * Average cost per unit
COGS = 109,500 units * $75.00 per unit
COGS = $8,212,500
5. Gross Profit:
Gross Profit = Net Sales - COGS
Gross Profit = $10,076,550 - $8,212,500
Gross Profit = $1,864,050
6. Operating Expenses:
Operating Expenses = Operating expenses excluding depreciation + Depreciation expense
Operating Expenses = $750,000 + $250,000
Operating Expenses = $1,000,000
7. Operating Income (Earnings Before Interest and Taxes - EBIT):
Operating Income = Gross Profit - Operating Expenses
Operating Income = $1,864,050 - $1,000,000
Operating Income = $864,050
8. Interest Expense:
Interest Expense = Average debt outstanding * Average interest rate
Interest Expense = $3,000,000 * 7.0%
Interest Expense = $210,000
9. Earnings Before Taxes (EBT):
EBT = Operating Income - Interest Expense
EBT = $864,050 - $210,000
EBT = $654,050
10. Taxes:
Taxes = EBT * Tax rate
Taxes = $654,050 * 30%
Taxes = $196,215
11. Net Income:
Net Income = EBT - Taxes
Net Income = $654,050 - $196,215
Net Income = $457,835
Therefore, the net income for Timmers for 2014 is $457,835.