Question

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash				$	20,000
Accounts receivable, net					170,000
Merchandise inventory					370,000
Prepaid expenses					8,000
Total current assets					568,000
Property and equipment, net					890,000
Total assets				$	1,458,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities				$	260,000
Bonds payable, 9%					340,000
Total liabilities					600,000
Stockholders’ equity:
Common stock, $5 par value				$	180,000
Retained earnings					678,000
Total stockholders’ equity					858,000
Total liabilities and stockholders' equity				$	1,458,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,240,000
Cost of goods sold		1,190,000
Gross margin		1,050,000
Selling and administrative expenses		640,000
Net operating income		410,000
Interest expense		30,600
Net income before taxes		379,400
Income taxes (30%)		113,820
Net income	$	265,580

     Account balances at the beginning of the year were: accounts receivable, $150,000; and inventory, $280,000. All sales were on account. Assets at the beginning of the year totaled $1,000,000, and the stockholders’ equity totaled $655,000.

Required:

Compute the following:

1.	Gross margin percentage. (Round your percentage answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

      

2.	Net profit margin percentage. (Round your answer to the nearest whole percentage place (i.e., 0.1234 should be entered as 12%).)

        

3.	Return on total assets. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

       

4.	Return on equity. (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

       

Answer 1

Answer 1.

Gross Margin Percentage = Gross Margin / Sales
Gross Margin Percentage = $1,050,000 / $2,240,000
Gross Margin Percentage = 46.88%

Answer 2.

Net Profit Margin = Net Income / Sales
Net Profit Margin = $265,580 / $2,240,000
Net Profit Margin = 12%

Answer 3.

Average Total Assets = ($1,000,000 + $1,458,000) / 2
Average Total Assets = $1,229,000

Return on Total Assets = [Net Income + Interest Expense * (1 - tax rate)] / Average Total Assets
Return on Total Assets = [$265,580 + $30,600 * (1 - 0.30)] / $1,229,000
Return on Total Assets = $287,000 / $1,229,000
Return on Total Assets = 23.4%

Answer 4.

Average Stockholders’ Equity = ($858,000 + $655,000) / 2
Average Stockholders’ Equity = $756,500

Return on Equity = Net Income / Average Stockholders’ Equity
Return on Equity = $265,580 / $756,500
Return on Equity = 35.1%