Question

Syracuse Shoes is a shoe store catering to young, fashionable but budget-conscious shoppers. They sell fashionable shoes at reasonable prices and reasonable quality. Instead of having just a few stores in the big malls, they have decided to place small outlets all over Syracuse, in easy reach of busy, young commuters (near business lunch outlets for example). After a few years, Syracuse Shoes decided to create a website and offer their products online. Below are the current financial figures for the retail outlets and for the online sales.
Calculate for both the Retail Stores and the Online Shop the:
4a. Profit Margin=
4b. Asset Turnover=
4c. Return on Assets (ROA)=
4d. And compare and contrast these two business models for Syracuse Shoes.
Syracuse Shoes Retail Stores Online Shop
Net Sales 400,000 100,000
COGS 200,000 50,000
Gross Profit 200,000 50,000
Expenses 40,000 20,000
Taxes 5,000 1,000
Earnings before Interest 155,000 29,000
Total Assets300,000 40,000

Answer 1

Answer:

See Below.

Explanation:

The following formulas can be used to calculate performance measures.

Profit margin = Net operating income / Sales

Asset turnover = Sales / Total assets

Return on Assets = Profit Margin * Asset Turn over

Now we calculate these for the two models.

Retail Stores

Profit Margin = 155,000 / 400,000 = 38.75%

Asset turn over = 400,000 / 300,000 = 1.33 times

Return on assets = 0.3875 * 1.33 = 0.5153 or 51.54%

Online Shop

Profit Margin = 29,000 / 100,000 = 29%

Asset Turn over = 100,000 / 40,000 = 2.5 times

Return on Assets = 2.5 * 0.29 = 0.725 or 72.5%

The online business shop seems to have higher performance and profitability. A limited amount of assets are able to yield high profit and turn over percentages. A higher volume of sales however, is derived from in store shops and even Retail stores are highly profitable. Expenses are consistent for both models but the assets invested to generate these figures are the main contrast in these models. Online shop only requires asset commitment of $40,000 to generate higher figures whereas retail stores needs higher asset commitment and hence this could be the essential relevant point for future expansion decisions.

Hope that helps.