2. E13-4 Computing Profitability Ratios [LO 13-4, LO 13-5] According to the prod

Question

2. 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 oquipment foll 8.1 peroent between 2012 and 2013. Let's seo whether these changes are roflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2013 $100,000 $120,000 60,00071,500 Sales Revenue Cost of Goods Sold Gross Profit Selling, General, and Administrative Expenses 36,000 40,000 48,500 37,000 500 475 3,500 11,025 1,000 5,000 Interest Expense Income before Income Tax Expense Income Tax Expense Net Income s 2.500 S 6,025 Required: 1-a. Compute the gross profit percentage for each year. (Round your answers to 1 decimal place.) 2012 2013 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 6

Explanation / Answer

1-a

Gross profit percentage = Gross profit / Sales

1-b

Gross profit percentage reduced from 2012 to 2013 which indicates that the Gross profit from each dollar of sales recuced from 2012

Less Gross profit

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2-a

Net profit margin = Net profit / Sales

2-b

Operating expenses decreased from 2012 to 2013, as a result though the Gross profit margin declined the Net Profit margin increased

Better Job

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3-a

Fixed asset turnover = turnover / fixed assets

3-b

As the asset turnover is more in 2012 the company better utilized the investment in fixed assets to generate revenues in 2012

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4-a

Return on equity = Net income/ equity

4-b

As the return on equity is higher in 2012 the company generated greater returns for shareholders in 2012 but not 2013

No

Gross profit Percentage 2012 40.4% (48,500 / 120,000) 2013 40% (40,000 / 100,000)

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