Question

E13-4 Computing Profitability Ratios [LO 13-4, LO 13-5]

According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 4.8 percent between 2012 and 2013. Let’s see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2013.

	2013			2012
Sales Revenue	$	118,000		$	147,000
Cost of Goods Sold		69,000			78,700
Gross Profit		49,000			68,300
Selling, General, and Administrative Expenses		37,800			40,600
Interest Expense		680			565
Income before Income Tax Expense		10,520			27,135
Income Tax Expense		2,500			6,800
Net Income	$	8,020		$	20,335

Required:
1-a.	Compute the gross profit percentage for each year. (Round your answers to 1 decimal place.)

1-b.	Assuming that the change from 2012 to 2013 is the beginning of a sustained trend, is Computer Tycoon likely to earn more or less gross profit from each dollar of sales in 2014?

More Gross Profit Less Gross Profit

2-a.	Compute the net profit margin for each year. (Round your answers to 1 decimal place.)

2-b.	Did Computer Tycoon do a better or worse job of controlling expenses in 2013 relative to 2012?
	Better Job Worse Job

3-a.	Computer Tycoon reported average net fixed assets of $56,000 in 2013 and $46,900 in 2012. Compute the fixed asset turnover ratios for both years. (Round your answers to 2 decimal places.)

3-b.	Did the company better utilize its investment in fixed assets to generate revenues in 2013 or 2012?
	2012 2013

4-a.	Computer Tycoon reported average stockholders’ equity of $55,800 in 2013 and $42,600 in 2012. Compute the return on equity ratios for both years. (Round your answers to 1 decimal place.)

4-b.	Did the company generate greater returns for stockholders in 2013 than in 2012?

Answer 1

Solution 1a:

Gross profit margin = Gross profit / Sales

2013 = $49,000/ $118,000 = 41.5%

2012 = $68,300 / $147,000 = 46.5%

Solution 1b:

As gross profit percentage is down for 2013, therefore computer tycoon likely to earn less gross profit from each dollar of sales in 2014.

Solution 2a:

Net Profit margin = Net profit / Sales

2013= $8,020/$118,000 = 6.8%

2012 = $20,335 / $147,000 = 13.8%

Solution 2b:

Computer tycoon did a worse job in of controlling expenses in 2013 relative to 2012.

Solution 3a:

Fixed assets turnvoer ratio = Sale / Average fixed assets

2013 = $118,000 / $56,000 = 2.11

2012 = $147,000 / $46,900 = 3.13

Solution 3b:

Company better utilize its investment in fixed assets to generate revenues in 2012.

Solution 4a:

Return on equity = Net Income / Average shareholder equity

2013 = $8,020 / $55,800 = 14.4%

2012 = $20,335 / $42,600 = 47.7%

Solution 4b:

No company did not generate greater return for stockholders in 2013 than in 2012