To determine the net profit of the company, we need to follow a series of steps that involve calculating the gross profit, the tax amount, and finally the net profit. Let's break this down step-by-step.
Step 1: Calculate Gross Profit
Gross profit is calculated by subtracting total costs from total revenue.
Formula:
[ \text{Gross Profit} = \text{Total Revenue} - \text{Total Cost} ]
Given:
- Total Revenue = N108 million
- Total Cost = N91 million
Calculation:
[ \text{Gross Profit} = N108 \text{ million} - N91 \text{ million} ]
[ \text{Gross Profit} = N17 \text{ million} ]
Step 2: Calculate Tax on Gross Profit
Next, we need to calculate the tax that the company has to pay on its gross profit. The tax rate is given as 45%.
Formula:
[ \text{Tax} = \text{Gross Profit} \times \text{Tax Rate} ]
Given:
- Tax Rate = 45% = 0.45
Calculation:
[ \text{Tax} = N17 \text{ million} \times 0.45 ]
[ \text{Tax} = N7.65 \text{ million} ]
Step 3: Calculate Net Profit
Net profit is calculated by subtracting the tax from the gross profit.
Formula:
[ \text{Net Profit} = \text{Gross Profit} - \text{Tax} ]
Calculation:
[ \text{Net Profit} = N17 \text{ million} - N7.65 \text{ million} ]
[ \text{Net Profit} = N9.35 \text{ million} ]
Conclusion
The net profit of the company for the year 1991 is
N9.35 million.
Explanation of Options
Now, let's analyze the options provided:
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A. N24.65 million: This option is incorrect because it does not reflect any of the calculations we performed. It seems to be an arbitrary figure that does not relate to the gross profit or tax calculations.
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B. N17.00 million: This option represents the gross profit, not the net profit. It is incorrect because it does not account for the tax that needs to be deducted from the gross profit.
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C. N9.35 million: This is the correct answer. It accurately reflects the net profit after deducting the tax from the gross profit.
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D. N7.65 million: This option is incorrect as it represents the tax amount, not the net profit. It does not consider the gross profit after tax.
Common Pitfalls
- Confusing Gross Profit with Net Profit: It's essential to remember that gross profit is before tax, while net profit is after tax.
- Miscalculating Tax: Ensure that the tax rate is applied correctly to the gross profit.
- Forgetting to Subtract Tax: Always remember to subtract the tax from the gross profit to find the net profit.
Revision Summary
- Gross Profit = Total Revenue - Total Cost.
- Tax = Gross Profit × Tax Rate.
- Net Profit = Gross Profit - Tax.
- The correct net profit for the company is N9.35 million.
This structured approach will help you tackle similar questions in your exams effectively!