Answer:
(a) An income statement was prepared for Memphis and Billing Companies (b) The ROA for Memphis is = 5.6% while for Billing is 6.9%.
The ROE for Memphis is 13.9% for Billings it is 17.4%
(c) The billing company is more profitable because from the view from the stockholders it has a higher return on equity
(d) The Memphis company is the discounter
Explanation:
Solution
Given that:
(A) The Income statement for Memphis and Billing companies
Common size Income statement
Memphis % Billings %
Sales 15,00,000 100 15,00,000 100
The cost of Goods 10,50,000 70 11,25,000 75.00
The Gross profit 4,50,000 30 3,75,000 25.0
Operating expenses 3,50,000 23.3 2,50,00 16.7
Net income 1,00.000 6.7 1,25,000 8.3
(B) We compute the return assets which is given below:
The return on assets is = The net income/Total assets * 100
For Memphis,
The return on assets is = 5.6% ($100,000/18,00,000) * 100
Fro Billings,
The return on assets = 6.9% ($ 125,000/18,00,000) * 100
For the return on equity we have the following given below:
Return on equity is =Net income/Stockholder's equity * 100
For Memphis,
The return on equity =13.9% ($100,000/720,000) * 100
Fr Billings,
The return on equity = 17.4% ($125,000/720,000) * 100
(C) The Billing company is more profitable because it has a higher return on rate on equity than that of the Memphis company.
(D) The Memphis has a lower Net profit margin of 6.7% therefore it is the discounter.
