Chapter 24: Q7SE (page 1357)

XTreme Sports Company makes snowboards, downhill skis, cross-country skis, skateboards, surfboards, and inline skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: Snow Sports and Non-snow Sports. The following divisional information is available for the past year:
Net Sales Revenue
Operating Income
Average Total Assets
ROI
Snow Sports
$5,500,000
$990,000
$4,100,000
24.1%
Non-snow Sports
8,500,000
1,530,000
6,100,000
25.1%
XTreme’s management has specified a 13% target rate of return. Calculate each division’s profit margin ratio.
Interpret your results.

Short Answer

Expert verified

Profit margin of both the division is18%.

Step by step solution

Meaning of Accounting Ratio

Accounting ratios are used to present the accounting information of a business entity mathematically. It explains the relationship between two or more accounting information and variables.

Computation of profit margin for snow sports

$\begin{array}{rcl} Profit margin ratio & = & \frac{Operating income}{Net sales} \times 100 \\ = & \frac{$ 990, 000}{$ 5, 500, 000} \times 100 \\ = & 18 % \end{array}$

Computation of profit margin for non-snow sports

$\begin{array}{rcl} Profit margin ratio & = & \frac{Operating income}{Net sales} \times 100 \\ = & \frac{$ 1, 530, 000}{$ 8, 500, 000} \times 100 \\ = & 18 % \end{array}$

Interpretation

As per the above computation, the profit margin ratio of snow sports and non-snow sports is equal i.e. 18%.

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Short Answer

Step by step solution

Meaning of Accounting Ratio

Computation of profit margin for snow sports

Computation of profit margin for non-snow sports

Interpretation

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	Net Sales Revenue	Operating Income	Average Total Assets	ROI
Snow Sports	\(5,500,000	\)990,000	$4,100,000	24.1%
Non-snow Sports	8,500,000	1,530,000	6,100,000	25.1%