Problems

PROFITABILITY
RATIOS
Problem 1:
ABC Ltd. has made plans for the next year. It is
estimated that the company will employ total assets of
900,000, 50% of the being financed by borrowed
capital at an interest rate of 16 % per year. The direct
costs for the year are estimated at 490,000 and all
other operating expenses are estimated at 70,000.
The goods will be sold to customers at 150 % of the
direct costs. Income tax rate is assumed to be 50 %.

Required: (a) Gross profit margin (b) Net profit margin

(c) Operating profit Margin
Problem 2:
XYZ Steaks had the best year ever, with sales of
P5,500,000 and operating profit of 960,000. The balance
sheet at the beginning of the year showed assets used in
production with a cost of 25,000,000 and accumulated
depreciation of 5,000,000. The company didnt buy any
assets during the year but did have depreciation expense
of 100,000.
The company earned net income of 1,823,000 during the
year. The Shareholders equity last year and current year
was 14,659,000 and 16,241,000 respectively.

Required: (a) ROI and (b) ROE

 Solution to problem 1
Calculation of sales: Calculation of Gross Profit Margin:
Sales = 150% of Direct Cost GPM = Gross Profit / Sales x 100%
= 490, 000 x 150 / 100 = 245,000 / 735,000 x 100%
= 735, 000 = 33.33%

Calculation of Profits:
Sales P735,000 Calculation of Net Profit Margin:
Less: Direct Costs 470,000 NPM = Net profit / Sales x 100%
GROSS PROFIT P245,000 = 51,500 / 735,00 x 100%
Less: Operating Expenses 70,000 = 7.01%
EBIT or Operating Profit P175,000
Less: Interest in Borrowed Capital
(900,000 x 50% x 16%) 72,000
Calculation of Operating Profit
Earnings after Tax (EAT) 103,000
Margin:
Less: Tax @ 50%(103,000 x 50%) 51,500 OPM = Operating profit / Sales x 100%
Profit after Tax or Net profit P51,500 = 175,000 / 735,000 x 100%
= 23.81%
Solution to problem 2
Calculate ROI:
Book value = Cost Accumulated Depreciation
Beginning: (25,000,000 5,000,000) = 20,000,000
Ending: [(25,000,000 5,000,000 + 1,000,000)] =19,500,000
Average Book value = Beginning + End / 2
= 20,000,000 + 19,000,000 / 2
= 19,500,000
ROI= Operating Profit / Average BV x 100%
= 960,000 / 19,500,000 x 100%
= 4.92%
Calculate ROE:
Average SHE = SHE previous year + SHE current year / 2
= (14,695,000 + 16,241,000) / 2
= 15,468,000
ROE = Net income / Average SHE x 100%
= 1,823,000 / 15,468,000 x 100%
= 11.79%