Question

The average price of a gallon of gas in 2015 dropped $0.94 (28 percent) from $3.34 in 2014 (to $2.40 in 2015). Let’s see whether these changes are reflected in the income statement of Insignia Corporation for the year ended December 31, 2015 (amounts in billions). 2015 2014 Revenues $ 290 $ 305 Cost of Purchased Crude Oil and Products 121 125 Other Operating Costs 61 55 Income before Income Tax Expense 108 125 Income Tax Expense 22 30 Net Income $ 86 $ 95 Required: 1. Compute the gross profit percentage for each year. Assuming that the change from 2014 to 2015 is the beginning of a sustained trend, is Insignia likely to earn more or less gross profit from each dollar of sales in 2016? 2. Compute the net profit margin for each year. Given your calculations here and in requirement 1, explain whether Insignia did a better or worse job of controlling expenses other than the costs of crude oil and products in 2015 relative to 2014. 3. Insignia reported average net fixed assets of $235 billion in 2015 and $164 billion in 2014. Compute the fixed asset turnover ratios for both years. Did the company better utilize its investment in fixed assets to generate revenues in 2015 or 2014? 4. Insignia reported average stockholders’ equity of $225 billion in 2015 and $164 billion in 2014. The company has not issued preferred stock. Compute the return on equity ratios for both years. Did the company generate greater returns for stockholders in 2015 or 2014?

Answer 1