Chapter 24, Problem 11QS

To determine

Introduction:

Profit Margin Ratio:

Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows:

  $ProfitMargin =\frac{NetIncome}{Sales}$

Asset Turnover Ratio:

Asset Turnover Ratio is an efficiency ratio that represents the sales earned on the average assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Asset Turnover Ratio is as follows:

  $AssetTurnoverRatio =\frac{Sales}{Averagetotalassets}$

Return on investment (ROI):

Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:

  $ROI =\frac{NetIncome}{Averagetotalassets}$

  $ROI (Expanded)=\frac{NetIncome}{Sales}\times \frac{Sales}{Averagetotalassets}$

Or

  $ROI=ProfitMarginRatio\times AssetTurnoverratio$

The missing figures for the investment centers

Answer to Problem 11QS

Solution:

The complete schedule with missing figures for the investment centers is as follows:

	Investment Center
	A	B
Sales (A)	$ 4,400,000	$ 10,400,000
Net Income (B)	$352,000	$ 832,000
Average invested Assets (C)	$ 1,400,000	$ 6,933,333
Profit Margin (D) = B/A=	8%	8%
Investment turnover (E) =A/C=	3.14	1.50
Return on investment (F) = B/C=	25%	12%

Explanation of Solution

The missing figures for the investment centers are calculated as follows:

Calculations for Investment Center A:
Calculation of Sales:
Net Income (B)	$352,000
Profit Margin (D)	8%
Sales = B/D=	$ 4,400,000
Calculation of Investment Turnover:
Sales (A)	$ 4,400,000
Average invested Assets (C)	$ 1,400,000
Investment turnover (E) =A/C=	3.14
Calculation of Return on investment:
Net Income (B)	$352,000
Average invested Assets (C)	$ 1,400,000
Return on investment (F) = B/C=	25%
Calculations for Investment Center B:
Calculation of Average Invested Assets:
Sales (A)	$10,400,000
Investment turnover (E)	$ 2
Average invested Assets (C) =A/E=	$ 6,933,333
Calculation of Net Income:
Average invested Assets (C)	$ 6,933,333
Return on investment (F)	12%
Net Income (B) = C*F=	$832,000
Calculation of Profit Margin:
Net Income (B)	$832,000
Sales (A)	$10,400,000
Profit Margin (D) = B/A=	8%

Conclusion

Hence, it can be concluded that Profit Margin Ratio, Asset Turnover Ratio, and

Returns on investment are profitability measures.