Question

Question Below are profitability Ratio ratio of Honey Flower in 2015 & 2016 2015 Profit margin Return on Squity 2016 1996 345 a. Ina gate whether the above ratio why. whether the above ratios are favorable/unfavorable for 2016 Compared to 2015 (2 marks) (2 marks) b. What does 2016 Profit margin ratio mean to you?

Answer 1

Part-a)

The above ratios are unfavorable for 2016 compared to 2015.

Profit margin and Return on Equity for 2016 has fallen as compared to the Profit margin and Return on Equity for 2015.

Higher the profit margin the more favorable will be the ratio.And Higher the Return on Equity the more favorable will be the ratio.Both the ratios dropped in 2016 so it is unfavorable for 2016 compared to 2015.

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Part-b)

Profit margin for 2016 is 23%. It means that Honey Flower has earned 23% of its total sales as net profit.

.

Part-c)

Two ways to increase profit margin in 2016 are as follows:

1)Reduction in Fixed Costs

2)Increase in Sales price per unit or reduction in variable cost per unit of the product.

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Part-d)

Two ways to increase equity ratio in 2016 are as follows:

1)Increase in Profit Margin

2)Increase in Production and Sales volume.