Question

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

c. Profit margin.

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

*equal income before interest and taxes

Short answer

Profit margin of the company is 8.33%.

Step-by-step solution

Retrun on assets 

$\begin{array}{rcl}\mathrm{Return}\mathrm{on}\mathrm{assets}& =& \frac{\mathrm{Net}\mathrm{income}}{\mathrm{Total}\mathrm{assets}}\\ & =& \frac{\$10,500}{\$80,000}\\ & =& 13.125\%\end{array}$

Calculation of Assets turnover ratio

$\begin{array}{rcl}\mathrm{Total}\mathrm{asset}\mathrm{turnover}\mathrm{ratio}& =& \frac{\mathrm{Net}\mathrm{sales}}{\mathrm{Average}\mathrm{total}\mathrm{assets}}\\ & =& \frac{\$126,000}{\$80,000}\\ & =& 1.575\end{array}$

Calculation of Profit margin as per DuPont equation

$\begin{array}{rcl}\mathrm{Profit}\mathrm{margin}& =& \frac{\mathrm{Return}\mathrm{on}\mathrm{assets}}{\mathrm{Assets}\mathrm{turnover}\mathrm{ratio}}\\ & =& \frac{13.125\%}{1.575}\\ & =& 8.33\%\end{array}$