B is corrent. The profit margin is calculated as net income divided by net sales. Net income is equal to $67,500 ($600,000 net sales – $400,000 cost of goods sold – $35,000 administrative expenses – $10,000 depreciation expense – $20,000 interest expense – $67,500 tax expense). Therefore, profit margin = 11.25% ($67,500 ÷ 600,000).
A is incorrect. Answer uses net income in numerator: $155,000 – 20,000 – 67,500 ÷ 20,000 = 3.375 times.
C is incorrect. This answer does not deduct administrative expenses when calculating earnings before interest and tax: [$600,000 – 400,000 – 10,000] ÷ 20,000 = 9.5 times.
D is incorrect. This answer educts interest expense when calculating earnings before interest and tax: $155,000 – 20,000 ÷ 20,000 = 6.75 times.
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