Q7SE - Horngren'S Financial And Managerial Accounting

Question

XTreme Sports Company makes snowboards, downhill skis, cross-country skis, skateboards, surfboards, and inline skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: Snow Sports and Non-snow Sports. The following divisional information is available for the past year:

	Net Sales Revenue	Operating Income	Average Total Assets	ROI
Snow Sports	\(5,500,000	\)990,000	$4,100,000	24.1%
Non-snow Sports	8,500,000	1,530,000	6,100,000	25.1%

 

XTreme’s management has specified a 13% target rate of return. Calculate each division’s profit margin ratio. 

Interpret your results.

Step-by-Step Solution

Answer

Profit margin of both the division is 18%.

Step 1: Meaning of Accounting Ratio

Accounting ratios are used to present the accounting information of a business entity mathematically. It explains the relationship between two or more accounting information and variables. 

Step 2: Computation of profit margin for snow sports

$\begin{array}{rcl}\mathrm{Profit} \mathrm{margin} \mathrm{ratio}& =& \frac{\mathrm{Operating} \mathrm{income}}{\mathrm{Net} \mathrm{sales}}\times 100\\ & =& \frac{\$990,000}{\$5,500,000}\times 100\\ & =& 18\%\end{array}$

Step 3: Computation of profit margin for non-snow sports

$\begin{array}{rcl}\mathrm{Profit} \mathrm{margin} \mathrm{ratio}& =& \frac{\mathrm{Operating} \mathrm{income}}{\mathrm{Net} \mathrm{sales}}\times 100\\ & =& \frac{\$1,530,000}{\$8,500,000}\times 100\\ & =& 18\%\end{array}$

Step 4: Interpretation

As per the above computation, the profit margin ratio of snow sports and non-snow sports is equal i.e. 18%.