Question

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	$	105,000		$	127,500
Cost of Goods Sold		62,500			73,500
Gross Profit		42,500			54,000
Selling, General, and Administrative Expenses		36,500			38,000
Interest Expense		550			500
Income before Income Tax Expense		5,450			15,500
Income Tax Expense		1,500			5,500
Net Income	$	3,950		$	10,000

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 $54,700 in 2013 and $45,600 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 $54,500 in 2013 and $41,300 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?
	Yes No

Answer 1

1(a) Compute the gross profit percentage for each year

2013 = ($42,500 / $105000) x 100 = 40.5%

2012 = ($54000 / $127500) x 100 = 42.3%

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?

Less Gross Profi

2(a) Compute the net profit margin for each year

2013 = ($3950 / $105000) x 100 = 3.8%

2012 = ($10000 / $127500) x 100 = 7.8%

2(b) Did Computer Tycoon do a better or worse job of controlling expenses in 2013 relative to 2012?

Worse Job

3(a) Computer Tycoon reported average net fixed assets of $54,700 in 2013 and $45,600 in 2012. Compute the fixed asset turnover ratios for both years.

2013 = $105000 / $54700 = 1.92 Times

2012 = $127500 / $45600 = 2.80 Times

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

In 2012

4(a) Computer Tycoon reported average stockholders’ equity of $54,500 in 2013 and $41,300 in 2012. Compute the return on equity ratios for both years.

2013 = ($3950 / $54500) x 100 = 7.2%

2012 = ($10000 / $41300) x 100 = 24.2%

4(b) Did the company generate greater returns for stockholders in 2013 than in 2012?

No