Question

P9-12A Delicious Limited competes in the fast food industry with Scrumptious Limited. Delicious embarked on a major expansion in 2018, borrowing a large amount of money and acquiring a small competitor. The acquisition doubled the number of restaurants that Delicious has. Scrumptious, on the other hand, took a more conservative approach and did not buy any new assets, focusing instead on a strategy of making existing operations more efficient. Data for the two companies are provided below (in thousands of dollars): 2018 2017 2016 Delicious Total assets $2,000 $1,100 $1,000 Net sales 3,100 1,500 1,600 Net income 350 150 140 Scrumptious Total assets 800 900 1,000 Net sales 1,900 1,700 2,009 Net income 180 200 210 Instructions (a) Calculate the (1) profit margin, (2) asset turnover, and (3) return on assets ratios for each company in 2017 and 2018. (b) Provide an explanation for the year-over-year changes in the ratios calculated in part (a). onrecia

Answer 1

Delicious Comment 2018 =350/3100 2017 =150/1500 Profit Margin =Net Income/Net Sales 11.29% 10.00% It is a measure of Profitability. Profit Margin has been increased by 1.29% as compared to last year. Sales are more than double in 2018 as compare to 2017 due to Acquisitions of Restaurants Asset Turnover =Net Sales/Average Total Assets =3100/((2000+1100)/2) =1500/((1000+1100)/2) Delicious efficiently utilised its assets in generating sales revenue 1.43 as the ratio increased to 2 as compared to 1.43 present in 2017 Return on Assets Ratio |=Net Income/Average Total Assets |=350/((2000+1100)/2) =150/((1000+1100)/2) The profitability of the company has been increased from 14.29% to 14.29% 22.58% 22.58% Scrumptious 2018 =Net Income/Net Sales =180/1900 2017 =200/1700 Profit Margin 9.47% 11.76% Profit Margin has been declined to 9.47% as compared to 11.76% Asset Turnover =Net Sales/Average Total Assets 1=1900/((800+900)/2) =1700/((900+1000)/2) Net Sales increased by $200 and Average Total Assets are $100 Less 1.79 than before. The resultant Asset Turnover is 2.24 2.24 Return on Assets Ratio =Net Income/Average Total Assets 1=180/((800+900)/2) 21.18% =200/((900+1000)/2) 21.05% There is no major change in profitability of the company.