"Chapter 3Problems1. Dental Delights has two divisions. Division A has a profit of $200,000 on sales of$4,000,000. Division B is only able to make $30,000 on sales of $480,000. Based on theprofit margins (returns on sales), which division is superior?3-1. Solution:Dental DelightsDivision A Division BNet Income $200,000 $30,000 = 5% = 6.25%Sales 4,000,000 $480,000 Division B is superiorS3-5 2. Griffey Junior Wear, Inc., has $800,000 in assets and $200,000 of debt. It reports netincome of $100,000. a. What is the return on assets? b. What is the return on stockholders ? equity? 3-2. Solution:Griffey Junior WearNet income a. Return on assets (investment) = Total assets $100,000 = 12.5%$800,000 Net income b. Return on equity =Stockholders' equity Stockholders' equity = total assets - total debt =-= $800,000 $200,000 $600,000 Net income $100,000 = =16.67% Stockholder's equity $600,000 Return on assets (investment) Return on equity = (1 - Debt/Assets) $200,000 Debt/Assets = = 25% $800,000 12.5% 12.5% Return on equity = = =16.67% (1 -.25) .75 S3-6 3. Bass Chemical, Inc., is considering expanding into a new product line. Assets to supportthis expansion will cost $1,200,000. Bass estimates that it can generate $2 million in annualsales, with a 5 percent profit margin. What would net income and return on assets(investment) be for the year?3-3. Solution:Bass Chemical, Inc.Net income = Sales × profit margin = $2,000,000 × 0.05 = $100,000 Net income Return on assets = (investment) Total assets $100,000 = $1,200,000 = 8.33% S3-7 4. Franklin Mint and Candy Shop can open a new store that will do an annual sales volume of$750,000. It will turn over its assets 2.5 times per year. The profit margin on sales will be 6 percent. What would net income and return on assets (investment) be for the year?3-4. Solution:Franklin Mint and Candy ShopNet income = Sales × Profit Margin = $750,000 × 0.06 = $45,000 Sales Assets = Total asset turnover $750,000 = 2.5 = $300,000 Net income Return on assets (invesment) = Total assets $45,000 = $300,000 =15% S3-8 5. Hugh Snore Bedding, Inc., has assets of $400,000 and turns over its assets 1.5 times peryear. Return on assets is 12 percent. What is its profit margin (return on sales)?3-5. Solution:Hugh Snore Bedding, Inc.Sales = Assets × total asset turnover = $400,000 ×1.5% = $600,000 Net income = Assets × Return on assets $48,000 = $400,000 ×12% Net income = $48,000/$600,000 = 8% Sales 6. One-Size-Fits-All Casket Co. ? fol sl i onc ws om : e statement for 2008 is asSales .......................................................................................$3,000,000Cost of goods sold .................................................................. 2,100,000Gross profit ............................................................................ 900,000Selling and administrative expense ........................................ 450,000Operating profit ...................................................................... 450,000Interest expense ...................................................................... 75,000Income before taxes ............................................................... 375,000Taxes (30%) ........................................................................... 112,500Income after taxes .................................................................. $262,500a. Compute the profit margin for 2008.b. Assume in 2009, sales increase by 10 percent and cost of goods sold increases by 25%.The firm is able to keep all other expenses the same. Once again, assume a tax rate of30 percent on income before taxes. What are income after taxes and the profit marginfor 2009?S3-9 "