P9-7A Blythe Corporation and Jacke Corpora tion, two companies of roughly the sa

ID: 2540554 • Letter: P

Question

P9-7A Blythe Corporation and Jacke Corpora tion, two companies of roughly the same size, are both involved in the manufacture of shoe-tracing devices. Each company depre ciates its plant assets using the straight-line approach. An investigation of their financial statements reveals the information shown below. Net income Sales revenue Total assets (average Plant assets (average Intangible assets (goodwill) Blythe Corp. 240,000 1,150,000 3,200,000 2,400,000 300,000 Jacke Corp. $ 300,000 1,200,000 3,000,000 1,800,000 0 Instructions (a) For each company, calculate these values: (1) Return on assets. (2) Profit margin. (3) Asset turnover. (b) Based on your calculations in part (a), comment on the relative effectiveness of the two companies in using their assets to generate sales. What factors complicate your ability to compare the two companies?

Explanation / Answer

Bylthe corp

Jacke corp

return on assets

net income/average total assets

240000/3200000

7.50%

300000/3000000

10.00%

profit margin

net income/total sales

240000/1150000

20.87%

300000/1200000

25.00%

Asset turnover

sales/averagetotal assets

1150000/3200000

0.359375

1200000/3000000

0.4

based on asset turnover jacke corp is more effective in using assets to generate sales as jacke corp asset turnover ratio is greater than Bylthe corp

A factor that inhibits comparing the two companies is the differing composition of total assets for each company. 9.375% (300000 ÷ 3200000) of Bylthe’s total assets are intangible assets. Jacke has no recorded intangible assets.