A company’s two divisions report the Information below. Electronics Sporting Goods Sales
40,000 Income 5,670 4,100 Average assets 40,500 25,000 Enter answers in the tabs below. Required 1 Required 2 Required 3 Calculate profit margin for each division. Division Electronics Sporting Goods Numerator: Profit margin Denominator: = Profit margin = Required 1 Required 2 >
The Correct Answer and Explanation is:
.
Completed Table:
Here is the table with the correct values filled in for the calculation of the profit margin for each division.
| Division | Numerator: | / | Denominator: | = | Profit margin | |
| Electronics | $ 5,670 | / | $ 81,000 | = | 7.0% | |
| Sporting Goods | $ 4,100 | / | $ 40,000 | = | 10.25% |
Explanation of Calculation
To determine the profit margin for each division, a standard financial formula is used. Profit margin is a measure of profitability, calculated by dividing a division’s income by its total sales. This ratio demonstrates how much profit the company makes for every dollar of sales generated by that division. A higher percentage indicates greater profitability. The ‘Average assets’ figure is not required for this specific calculation.
Electronics Division Calculation:
The calculation begins by identifying the correct figures from the provided data.
100 and sales are $40,000. Following the same formula, the income is the numerator and sales is the denominator.
The calculation is:
$4,100 (Income) ÷ $40,000 (Sales) = 0.1025
This result of 0.1025, or 10.25%, means that the Sporting Goods division earns 10.25 cents in profit for each dollar of sales revenue.
By comparing the two divisions, it is clear that the Sporting Goods division has a higher profit margin. This suggests it is more profitable on a per-dollar-of-sales basis than the Electronics division. The “Average assets” figures of $40,500 for Electronics and $25,000 for Sporting Goods are not required for this specific calculation, as they are used for other performance metrics like return on investment (ROI).* Numerator: The income for the Electronics division is $5,670.
- Denominator: The sales for the Electronics division are $81,000.
The formula is applied as follows:
Profit Margin = Income / Sales
Profit Margin = $5,670 / $81,000 = 0.07
To express this result as a percentage, the decimal is multiplied by 100.
0.07 * 100 = 7.0%
Thus, the profit margin for the Electronics division is 7.0%. This signifies that the division earns 7 cents of profit for every dollar of sales.
Sporting Goods Division Calculation:
The same procedure is followed for the Sporting Goods division.
- Numerator: The income for the Sporting Goods division is $4,100.
- Denominator: The sales for the Sporting Goods division are $40,000.
The formula is applied as follows:
Profit Margin = Income / Sales
Profit Margin = $4,100 / $40,000 = 0.1025
To convert this decimal into a percentage, it is multiplied by 100.
0.1025 * 1
