BADM 2001-10: Introduction to Business- Fall 2020
Instructor: Dr. Rehab Abdel Aziz
Assignment 3
Due date: Saturday, October 24th, 2020
Points: (30 points)
Look at the three financial statements on page 3 excerpted from the Foundation FastTrack
Industry ID F117065, Rd 4. Answer the following questions explaining the reasons and
justification for your answers.
1) Calculate the ROS for the six companies. Which company is the most profitable? Why? (6
points).
Return of sales = (Profit / sales) x 100
Andrews:
5752/74875 = 7.68%
Baldwin:
824/72522 = 1.14%
Chester:
507/67154 = 0.75%
Digby:
-309/67296 = -0.459%
Erie:
-3160/67433 = -4.69%
Ferris:
6611/89546 = 7.38%
Company Andrews is the most profitable since it has the highest return on sale
percentage. In other words, this company produces the highest profit with regard to its
sales.
2) Calculate the contribution margins of the 6 companies. Which company has the best
contribution margin? Is this good enough? Why or why not? (6 points).
Contribution margin = sales – variable cost
Contribution margin ratio = contribution margin/revenue
Andrews:
74875 – 47730 = 27145
27145/74875 = 36.3%
Baldwin:
72522 – 51718 = 20804
20804/72522 = 28.7%
Chester:
67154 – 46891 = 20263
20263/67154 = 30.2%
Digby:
67296 – 49522 = 17774
17774/67296 = 26.4%
Erie:
67433 – 48674 = 18759
18759/67433 = 27.8%
Ferris:
89546 – 58310 = 31236
31236/89546 = 34.9%
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Company Andrews has the best contribution margin ratio of 36.3%.
This is good enough since the acceptable value is 30% or higher
However, the higher the better
3) Calculate the Net Margins for the 6 companies. Which company has the highest net
margin? Is this good enough? Why or why not? (6 points).
Net margin ratio = (CM – FC) /sales
Andrews:
11566/74975 = 15.43%
Baldwin:
4049/72522 = 5.58%
Chester:
3651/67154 = 5.44%
Digby:
3047/67296 = 4.53%
Erie:
-1309/67433 = 1.94%
Ferris:
13872/89546 = 15.49%
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Company Ferris has the highest net margin ratio of 15.49%
No, this is not good enough. Since the recommended ratio is 20%
However, the higher the better
4) Explain why company Erie got an emergency loan worth $ 9,854? (6 points).
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It ran out of cash, so it had a forced emergency loan.
Inventory is negative in the cash flow statement
o Which means that the inventory increased by exactly $13874
o Cash is trapped in inventory
Early retirement of long-term debt decreased the cash available by $1733
They did not finance the for their investment well
o Investment of $17779
o Financing with common stock $6000
o Financing with long term debt $5000
o Difference between investment and financing it is almost $7000
5) Look at the income statement survey. Explain the reasons why Andrews and Baldwin
Companies have approximately achieved similar total sales values (Andrews $74875 and
Baldwin $72,522), yet company Andrews was able to achieve a net profit of $5,752 while
company Baldwin has only achieved a net profit of $824. (6 points).
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The variable cost of Baldwin is higher than that of Andrews
May be caused by increased labor cost, material cost, or inventory carrying cost
It is probably mainly because of the inventory carrying cost, since Baldwin had
inventory at year end costing 16,465$ while Andrews had only 3,697$ worth of
inventory
o This decreases the contribution margin of Baldwin
o Which decreased the amount left to finance the fixed costs, the interest, and
the taxes