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Q7SE

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Horngren'S Financial And Managerial Accounting
Found in: Page 1357

Short Answer

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.

Profit margin of both the division is 18%.

See the step by step solution

Step by Step Solution

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

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

Step 4: Interpretation

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

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