Chapter 7, Problem 9PB

1.

To determine

Calculate return on assets, profit margin and asset turnover for PA Pizza.

Explanation of Solution

Rate of return on total assets:

Rate of return on the total assets is the ratio of the net income, and interest expense to the average total assets. The rate of return on total assets measures the efficiency of the business. It measures how efficiently the business is using its total assets in generating the income.

The rate of return on the total assets is calculated as follows:

$\text{Rate of return on assets=}\frac{\text{Net}\text{income +Interest expense}}{\text{Average total assets}}$

Determine the return on assets ratio:

The return on assets ratio is determined as follows:

$\begin{array}{c}\text{Rate of return on assets=}\frac{\text{Net}\text{income }}{\text{Average total assets (1)}}\\ \text{=}\frac{\text{\$2,223}}{\text{\$15,232}}\\ \text{=14}\text{.6\%}\end{array}$

Working note:

Determine the average total assets:

$\begin{array}{c}\text{Average total assets = }\frac{\text{Total assets}\left(\text{Βeginning}\right)\text{+Total assets }\left(\text{Ending}\right)}{\text{2}}\\ \text{=}\frac{\text{\$14,998+\$15,465}}{\text{2}}\\ \text{=\$15,232}\end{array}$ (1)

Hence, the return on asset ratio is 14.6%.

Determine the profit margin ratio:

$\begin{array}{c}\text{Profit margin ratio=}\frac{\text{Net}\text{income}}{\text{Net}\text{sales}}\text{×100}\\ \text{=}\frac{\text{\$2,223}}{\text{\$24,128}}\text{×100}\\ \text{=9}\text{.21\%}\end{array}$

Hence, the profit margin ratio is 9.21%.

Determine the asset turnover ratio:

$\begin{array}{c}\text{Asset turnover =}\frac{\text{Net}\text{sales}}{\text{Average total assets}}\\ \text{=}\frac{\text{\$24,128}}{\text{\$15,232}}\\ \text{=1}\text{.6 Times}\end{array}$

Hence, the asset turnover ratio is 1.6 times.

2.

To determine

Calculate return on assets, profit margin and asset turnover for Pizza PR.

Explanation of Solution

Determine the return on assets ratio:

$\begin{array}{c}\text{Rate of return on assets=}\frac{\text{Net}\text{income }}{\text{Average total assets (2)}}\\ \text{=}\frac{\text{\$129}}{\text{\$1,038}}\\ \text{=12}\text{.42\%}\end{array}$

Working note:

Determine the average total assets:

$\begin{array}{c}\text{Average total assets =}\frac{\text{Total assets}\left(\text{Βeginning}\right)\text{+Total assets }\left(\text{Ending}\right)}{\text{2}}\\ \text{=}\frac{\text{\$919+\$1,157}}{\text{2}}\\ \text{=\$1,038}\end{array}$ (2)

Hence, the return on asset ratio is 12.42%.

Determine the profit margin ratio:

$\begin{array}{c}\text{Profit margin ratio=}\frac{\text{Net}\text{income}}{\text{Net}\text{sales}}\text{×100}\\ \text{=}\frac{\text{\$129}}{\text{\$1,835}}\text{×100}\\ \text{=7}\text{.02}\end{array}$

Hence, the profit margin ratio is 7.02%.

Determine the asset turnover ratio:

Determine the asset turnover ratio is determined as follows:

$\begin{array}{c}\text{Asset turnover =}\frac{\text{Net}\text{sales}}{\text{Average total assets}}\\ \text{=}\frac{\text{\$1,835}}{\text{\$1,038}}\\ \text{=1}\text{.8 Times}\end{array}$

Hence, the asset turnover ratio is 1.8 Times.

3.

To determine

Comment on the ratios.

Explanation of Solution

• PA Pizza has higher profit margin when compared to Pizza PR.
• Pizza PR has higher asset turnover when compared to PA Pizza.
• Overall, PA Pizza has a high return on assets when compared to Pizza PR.