Question

Easter Egg and Poultry Company has \(2,000,000 in assets and \)1,400,000 of debt. It reports net income of $200,000.

c. If the firm has an asset turnover ratio of 2.5 times, what is the profit margin

(return on sales)?

Short answer

The profit margin of the company is 4%.

Step-by-step solution

Calculating the net sales of the company

$$\begin{gathered} TotalSales=TotalAssets\times AssetturnoverRatio \\ =\$2,000,000\times 2.50 \\ =\$5,000,000 \end{gathered}$$

Profit margin of the company

$$\begin{gathered} Profitmargin=\frac{Netincome}{Sales} \\ =\frac{\$200,000}{\$5,000,000} \\ =4\% \end{gathered}$$