Earnings and Expenses (Year Ending January 2012) Sales $65,000,000 Cost of Goods
ID: 2798972 • Letter: E
Question
Earnings and Expenses (Year Ending January 2012)
Sales $65,000,000
Cost of Goods Sold (COGS) $60,000,000
Pretax Earnings $7,475,000
Selected Balance Sheet Items
Merchandise Inventory $3,737,500
Total Assets $7,000,000
Dulaney's Stores has posted the following yearly earnings and expenses.
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Click the icon to view the yearly data.
a. Dulaney's current profit margin is
nothing %.
(Enter your response rounded to one decimal place.)
Dulaney's current yearly ROA is
nothing %.
(Enter your response rounded to one decimal place.)
b. Suppose COGS and merchandise inventory were each cut by
55%.
The new pretax profit margin is
nothing %.
(Enter your response rounded to one decimal place.)
The new ROA is
nothing %.
(Enter your response rounded to one decimal place.)
c. Based on the current profit margin in part a., Dulaney would have to generate
$nothing
in additional sales in order to have the same effect on pretax earnings as a
55%
decrease in merchandise costs. (Enter your response rounded to the nearest dollar.)
Explanation / Answer
Sales : $ 65,000,000
Cost of goods sold: $ 60,000,000
Pretax earnings: $ 7,475,000
Merchandise Inventory: $ 3,737,500
Total Assets : $ 7,000,000
Current profit margin can be calculated by dividing pretax earnings / total sales i.e. $ 7,475,000/$65,000,000
=0.115 i.e. 11.5%
Total Assets: $ 7,000,000
Return on Assets= net income /total assets,since we are not given any tax rate , we will calculate this ratio using pretax earnings, therefore, return on assets= pretax earnings/total assets= $7,475,000/$7,000,000= 1.07x
Suppose COGS and merchandise inventory were each cut by 55%, new COGS = 45% of previous COGS= 0.45*60,000,000=$27,000,000, Change in COGS= $60,000,000-$ 27,000,000= $33,000,000
By this much amount our pretax earnings will increase = $7,475,000+$ 33,000,000= $40,475,000
So new profit margin= $ 40,475,000/$65,000,000= 62.27%
New Merchandise inventory= 45% of previous merchandise inventory= 0.45* $3,737,500=$1,681,875
Change in Merhcandise inventory= $3,737,500-$ 1,681,875= $2,055,625
By this much amount our total assets will decrease i.e. $7,000,000-$ 2,055,625= $4,944,375
return on assets= $40,475,000/$4,944,375= 8.1x
In order to have the same effect on pretax earnings i.e. to have pretax earnings of $40,475,000 at same profit margin of 11.5%, we need to have sales equal to $ 40,475,000/11.5%= 351,956,521.74 this is the amount of total sales that the company will need to achieve which is an increase of $ 351,956,521.74-$ 65,000,000= $286,956,521.74 (additional sales to achieve the desired outcome)
Note that yearly earnings data mentioned in the question is not visible to us, all the calculations are done basis data available in the question, also we have used pretax income instead of net income in return calculations as tax percentage is not available , to get net income, we can use the formula as pretax income * (1- tax rate)
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