Chapter 3, Problem 3.1ME

To determine

Concept 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:

Profit Margin = Net Income / 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: The Return on Investment is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

Return on Investment = Net Income / Average Total Assets

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  $AveragetotalAssets=\frac{\left(Beginningtotalassets+Endingtotalassets\right)}{2}$

To Calculate:

The Margin, turnover, and Return on Investment for Firm J

Answer to Problem 3.1ME

The Margin, turnover, and Return on Investment for Firm J are as follows:

	Firm J
Profit Margin	16.00%
Asset Turnover Ratio	1.20
Return on Total Assets	19.20%

Explanation of Solution

The Margin, turnover, and Return on Investment for Firm J are calculated as follows:

	Firm J
Net Income (A)	$ 76,800
Net Sales (B)	$ 480,000
Profit Margin (C) = A/B =	16.00%
Average Total Assets (D)	$ 400,000
Asset Turnover Ratio (E)	1.20
Return on Total Assets =(A/D)) =	19.20%