Question

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 equipment fell 3.8 percent between January and December 2016 Let's see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2016 Sales Revenue Cost of Goods Sold Gross Profit Selling. General, and Administrat Expenses Interest Expense Income before Income Tax Expense Income Tax Expense Net Income Required: 1. Compute the gross profit percentage for each year. Assuming that the change from 2015 10 201 is the beginning of a sustained trend, is Computer Tycoon key to earn more or less gross profit from school of sales in 2017 2. Compute the net profit margin for each year Give your calculations here and in requirement t explain whether Computer Tycoon did a better or worse job of controlling operating expenses in 2016 relato 2015 3. Computer Tycoon reported average net fixed assets of $54300 n 2016 and $45200 in 2015. Compute the feed asset turnove ratios for both years. Did the company better til vestment in fixed assets to generate revenues 2016 OF 2015 4. Computer Tycoon reported average stockholders equity of 554.100 in 2016 and $40.900 in 2015. The company has not issued pretened stock Compute the return on equity ratios for both years. Did the company generate greater returns for stockholders in 2016 than in 2015?

Answer 1

gross profit margin	(gross profit / sales ) * 100
	2015 ($)	2016 ($)
gross profit	49600	40500
sales	121500	101000
margin	40.8%	40.1%

Looking at the gross margin ratio, it can be assumed that sales will further decline in 2017 which will result in gross margin to decline slightly in 2017.

net profit margin	(net profit / sales ) * 100
	2015 ($)	2016 ($)
net profit	6820	2890
sales	121500	101000
margin	5.6%	2.9%

Net profit has declined significantly to 2.9% in 2016 from 5.6% in 2015. The primary reason being decline in revenue to $101,000 in 2016 from $121,500 in 2015. Company has been able to control majority of its expenses i.e., selling, general and administrative expenses in 2016 apart from interest expense which increased marginally. Hence, the company has been to able to control expenses.

fixes assets turnover	net sales / average fixed assets
	2015 ($)	2016 ($)
sales	121500	101000
average fixed assets	45200	54300
ratio	2.69	1.86

Fixed assets turnover has declined from 2.69% in 2015 to 1.86% in 2016. A higher ratio ratio indicates that the company has less money tied up in fixed assets. A declining ratio indicates that the company has invested more money in fixed assets. Looking at both the ratios, the company utilized its assets better in 2015.

return on equity	net profit / equity
	2015 ($)	2016 ($)
net profit	6820	2890
equity	40900	54100
ratio	16.7%	5.3%

The company did not report high return on equity. The return on equity has declined to 5.3% in 2016 from 16.7% in 2015, the reason being fall in net profit in 2016.