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4.
Significant relations revealed
Bennington’s selling expenses, administrative expenses, and
income taxes
took larger portions of each sales dollar in 2005 than 2004.
However,
because the cost of sales took a smaller portion in 2005, some
efficiency
was gained. In 2006 these trends continued. Selling expenses,
administrative expenses, and income taxes continued to take a
greater
portion of each sales dollar while the gross profit portion
continued to
improve.
Problem AP13-2
1.
a. Gross profit
margin
Company A
$20,000 x 100%
$80,000
= 25%
Company B
$24,000 x 100%
$120,000
= 20%
Company A
$10,000 x 100%
$80,000
= 12.5%
Company B
$15,000 x 100%
$120,000
= 12.5%
c. Inventory turnover
Company A
$60,000
($25,000 + $15,000)/2
= 3 times
Company B
$96,000
($22,500 + $17,500)/2
= 4.8 times
d. Return on
common
shareholder’s
equity
Company A
$10,000 x 100%
($38,000 + $42,000)/2
= 25%
Company B
$15,000 x 100%
($36,000 + $44,000)/2
= 37.5%
e. Current ratio
Company A
$45,000
$5,000
=9:1
Company B
$40,000
$10,000
=4:1
f. Quick ratio
Company A
$30,000
$5,000
=6:1
Company B
$22,500
$10,000
= 2.25 : 1
g. Debt to total
assets ratio
Company A
$5,000
$47,000
= 10.64%
Company B
$10,000
$54,000
= 18.52%
2.
Company B is the most profitable, both in terms of actual
profit for the
period $15,000 compared to $10,000, and also in terms of
capital
employed; B has managed to achieve a return of $37.50 for
every $100
invested, i.e. 37.50. A has managed a lower return of 25%.
Therefore, based on the above analysis, Company B should be
chosen.
REASONS:
(i) Possibly managed to sell far more merchandise because of
lower prices, i.e. took only 20% margin as compared with A’s
25% margin.
(ii) Maybe more than efficient use of merchandise means in the
business. Note he has more equipment, and perhaps as a
consequence kept other expenses down to $6,000 as compared
with A’s $9,000.
(iii) Did not have as much stock lying idle. Inventory turnover
is 4.8
times in the year as compared with 3 times for A.
(iv) A’s current ratio of 9 is far greater than normally needed.
B
kept it down to 4. A, therefore, had too much money lying idle
and not doing anything.
(v) The quick ratio for A is also higher than necessary.
(Other possible REASONS could also be accepted)