Chapter 2: Q3-1BP (page 78)

Low Carb Diet Supplement Inc. has two divisions. Division A has a profit of$156,000 on sales of $2,010,000. Division B is able to make only $28,800 onsales of $329,000. Based on the profit margins (returns on sales), which divisionis superior?

Short Answer

Expert verified

The profit margin of division A is 7.76%, and division B is 8.75%. Based on this, Division B of the company is superior.

Step by step solution

Step: Profit margin of division A:

$\begin{array}{rcl} P r o f i t m a r g i n & = & \frac{N e t i n c o m e}{S a l e s} \\ = & \frac{$ 156, 000}{$ 2, 020, 000} \\ = & 7.76 % \end{array}$

Step: Profit margin of division B:

$\begin{array}{rcl} P r o f i t m a r g i n & = & \frac{N e t i n c o m e}{S a l e s} \\ = & \frac{$ 28, 800}{$ 329, 000} \\ = & 8.75 % \end{array}$

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Increase in accounts receivable	Decrease in prepaid expenses
Increase in notes payable	Increase in inventory
Depreciation expense	Dividend payment
Increase in investment	Increase in accrued expenses
Decrease in account payable

Times mirror and glass company
Sales	\(126,000
Less: Cost of goods sold	93,000
Gross profit	\)33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\(18,000
Less: Interest expenses	3,000
Earning before taxes	\)15,000
Less: Taxes (30%)	4,500
Earning after taxes	$10,500

Accumulated depreciation	\(309,000
Retained earnings	187,000
Cash	14,000
Bonds payable	136,000
Accounts receivable	54,000
Plant and equipment – original cost	775,000
Accounts payable	35,000
Allowance for bad debts	9,000
Common stock, \)1 par, 100,000 share outstanding	100,000
Inventory	70,000
Preferred stock, $59 par, 1,000 share outstanding	59,000
Marketable securities	24,000
Investments	20,000
Notes payable	34,000
Capital paid in excess of par (common stock)	88,000

Low Carb Diet Supplement Inc. has two divisions. Division A has a profit of\(156,000 on sales of \)2,010,000. Division B is able to make only \(28,800 onsales of \)329,000. Based on the profit margins (returns on sales), which divisionis superior?

Short Answer

Step by step solution

Step: Profit margin of division A:

Step: Profit margin of division B:

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