Question

Following are data for BioBeans and GreenKale, which sell organic produce and are of similar size. BioBeans GreenKale Average total assets $ 215,000 $ 166,500 Net sales 105,000 33,300 Net income 15,050 3,900 Required: 1a. Compute the profit margin for both companies. 1b. Compute the return on total assets for both companies. 2. Based on analysis of these two measures, which company is the preferred investment

Answer 1

Answer:

1a. We have:

BioBeans' profit margin = 14.33%

GreenKale's profit margin = 11.71%

1b. We have:

BioBeans' return on total assets = 7%

GreenKale's return on total assets = 2.34%

2. BioBeans is the preferred investment.

Explanation:

1a. Compute the profit margin for both companies.

Profit margin = Net income / Net sales ........... (1)

Using equation (1), we have:

BioBeans' profit margin = $15,050 / $105,000 = 0.1433, or 14.33%

GreenKale's profit margin = $3,900 / $33,300 = 0.1171, or 11.71%

1b. Compute the return on total assets for both companies.

Return on total assets = Net income / Average total assets ............ (2)

Using equation (1), we have:

BioBeans' return on total assets = $15,050 / $215,000 = 0.07, or 7%

GreenKale's return on total assets = $3,900 / $166,500 = 0.0234, or 2.34%

2. Based on analysis of these two measures, which company is the preferred investment?

Since the profit margin and return on total assets of BioBeans are greater than the profit margin and return on total assets of GreenKale, this indicates that BioBeans is the preferred investment.