Page 200 - Calculating Agriculture Cover 20191124 STUDENT - A

21-12 Profitability & Performance Measures CH 21]

= ($1,500,000 – $75,000) – $250,000
—————————————————
$1,500,000 – $75,000

$1,425,000 – $250,000
= ———————————
$1,425,000

$1,175,000
= ——————
$1,425,000
= 0.82:1

(Total Sales – Returns & Allowances) – Cost of Goods
(b) Gross Profit Margin Ratio % = ————————————————————— x 100%
Total Sales – Returns & Allowances

= ($1,500,000 – $75,000) – $250,000 x 100%
—————————————————
$1,500,000 – $75,000
$1,425,000 – $250,000
= ——————————— x 100%
$1,425,000
$1,175,000
= —————— x 100%
$1,425,000

= 0.82 x 100%
= 82%

Newell’s Feed and Supply Gross Profit Margin Ratio is 82%. This is a high ratio
indicating that Newell’s Feed and Supply management is getting a good return for its dollar
invested and is paying off its inventory costs and has sales revenue to cover operating costs
which is what a well run business wants.

Analysis: The Gross Profit Margin ratio is a profitability ratio measuring how profitable a
firm is as it sells its inventory. It makes sense that higher ratios are favored to cover all
costs of operating a business and return a profit to the owners’ investment. A higher ratio
also means that the company is selling its inventory at a higher profit percentage.
High ratios are typically achieved by two ways: First, purchase inventory very
inexpensively. Retailers, such as Newell’s Feed and Supply need to seek out purchase
discounts when purchasing their inventory from the manufacturer or a wholesaler. This
insures a higher profit margin.
Second is through the markup they use in pricing their inventory to their customers.
Obviously, markups are established when considering the quality of the inventory being
offered, what the competition is offering, and what the consumers are willing to pay. Taco
Bell marks its menu for the area its stores are in, as an example, the burrito selling on
Rodeo Drive, in Beverly Hills, California is marked higher than the same product offered in
Lee’s Summit, Missouri. Different clientele, different economics result in different decisions
made for the same product.
Profit Margin Ratio. The profit margin ratio is a calculation to determine the return
on sales ratio. It is a profitability ratio that measures the amount of net income earned with
each dollar of sales generated by comparing the net income and net sales of a company.
This return on sales ratio is often used by internal management to set performance goals for
the future.
The profit margin ratio is calculated by dividing the net income by the net sales. The
equation for the Profit Margin Ratio is:

Net Income
Profit Margin Ratio = ——————
Net Sales

Net sales is calculated by subtracting any returns & allowances refunds from gross
sales. Net income equals total revenues minus total expenses and is usually the last
number reported on the income statement.

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