According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 3.8 percent between January and December 2016. Let's see whether these changes are reflected in the income statement of Computer Tycoon Inc: for the year ended December 31, 2016.
2016
Sales Revenue: $139,500
Cost of Goods Sold: 76,700
Gross Profit: 62,800
Selling, General, and Administrative Expenses: 39,600
Interest Expense: 540
Income before Income Tax Expense: 22,660
Income Tax Expense: 6,300
Net Income: $16,360
2015
Sales Revenue: $113,000
Cost of Goods Sold: 66,500
Gross Profit: 46,500
Selling, General, and Administrative Expenses: 37,300
Interest Expense: 530
Income before Income Tax Expense: 8,670
Income Tax Expense: 2,100
Net Income: $6,570
Required:
1. Compute the gross profit percentage for each year. Assuming that the change from 2015 to 2016 is the beginning of a sustained trend, is Computer Tycoon likely to earn more or less gross profit from each dollar of sales in 2017?
2. Compute the net profit margin for each year. Given your calculations here and in requirement 1, explain whether Computer Tycoon did a better or worse job of controlling operating expenses in 2016 relative to 2015.
3. Computer Tycoon reported average net fixed assets of $55,500 in 2016 and $46,400 in 2015. Compute the fixed asset turnover ratios for both years. Did the company better utilize its investment in fixed assets to generate revenues in 2016 or 2015?
4. Computer Tycoon reported average stockholders' equity of $55,300 in 2016 and $42,100 in 2015. The company has not issued preferred stock. Compute the return on equity ratios for both years. Did the company generate greater returns for stockholders in 2016 than in 2015?