The following selected data come from Celebration Company's income statements over three recent years. Based on the data, what is Celebration's profit margin for each of the three years, and do the ratios show deterioration or improvement in Celebration's profitability? Assume the industry average is 0.065 or 6.5%.

A) 0.039; 0.027; 0.023; weak but improving
B) 0.39; 0.40; 0.41; weak but improving slightly
C) 0.038; 0.026; 0.022; weak but improving
D) 0.35; 0.34; 0.32; weak and deteriorating slightly

Question

The following selected data come from Celebration Company's income statements over three recent years. Based on the data, what is Celebration's profit margin for each of the three years, and do the ratios show deterioration or improvement in Celebration's profitability? Assume the industry average is 0.065 or 6.5%.

A) 0.039; 0.027; 0.023; weak but improving 
B) 0.39; 0.40; 0.41; weak but improving slightly 
C) 0.038; 0.026; 0.022; weak but improving 
D) 0.35; 0.34; 0.32; weak and deteriorating slightly

Quizplus · Accepted Answer

To calculate the profit margin, we divide net income by total revenue.

For year 1: 
Profit margin = 57,000 / 1,500,000 = 0.038 or 3.8%
For year 2: 
Profit margin = 42,000 / 1,600,000 = 0.026 or 2.6%
For year 3: 
Profit margin = 33,000 / 1,500,000 = 0.022 or 2.2%

All three ratios are below the industry average of 6.5%, indicating weak profitability. However, the ratios are improving slightly each year, so we can conclude that Celebration's profitability is weak but improving. Therefore, the best choice is option C.

The Following Selected Data Come from Celebration Company's Income Statements