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Low Carb Diet Supplement, Inc., has two divisions. Division A has a profit of $306,000 on sales of $2,410,000. Division B is able to make only $28,700 on sales of $354,000.

a. Compute the profit margins (return on sales) for each division. (Input your answers as a percent rounded to 2 decimal places.)

b. Based on the profit margins (returns on sales), which division is superior?

	Division B
	Division A

Database Systems is considering expansion into a new product line. Assets to support expansion will cost $970,000. It is estimated that Database Systems can generate $2,060,000 in annual sales, with an 6 percent profit margin.

What would net income and return on assets (investment) be for the year? (Input your return on assets answer as a percent rounded to 2 decimal places.)

Problem 3-6 Profitability ratios [LO3-2]

Dr. Zhivago Diagnostics Corp.'s income statement for 20X1 is as follows:

Sales	$	2,390,000
Cost of goods sold		1,400,000
Gross profit	$	990,000
Selling and administrative expense		352,000
Operating profit	$	638,000
Interest expense		52,700
Income before taxes	$	585,300
Taxes (30%)		175,590
Income after taxes	$	409,710

a. Compute the profit margin for 20X1. (Input the profit margin as a percent rounded to 2 decimal places.)

b. Assume in 20X2, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Once again, assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2? (Input the profit margin as a percent rounded to 2 decimal places.)

Easter Egg and Poultry Company has $1,190,000 in assets and $647,000 of debt. It reports net income of $185,000. a. What is the firms return on assets? (Enter your answer as a percent rounded to 2 decimal places.)

b. What is its return on stockholders equity? (Enter your answer as a percent rounded to 2 decimal places.)

c. If the firm has an asset turnover ratio of 1.5 times, what is the profit margin (return on sales)? (Enter your answer as a percent rounded to 2 decimal places.)

Baker Oats had an asset turnover of 1.7 times per year. a. If the return on total assets (investment) was 13 percent, what was Bakers profit margin? (Input your answer as a percent rounded to 1 decimal place.)

b. The following year, on the same level of assets, Bakers assets turnover declined to 1.3 times and its profit margin was 10 percent. How did the return on total assets change from that of the previous year?

	Increased
	Decreased
	No change

Gates Appliances has a return-on-assets (investment) ratio of 20 percent. a. If the debt-to-total-assets ratio is 25 percent, what is the return on equity? (Input your answer as a percent rounded to 2 decimal places.)

b. If the firm had no debt, what would the return-on-equity ratio be? (Input your answer as a percent rounded to 2 decimal places.)

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