The owner of a local pet supply store fears their efforts to increase the store's gross profit and net income are futile. They compiled the following information from their financial statements over the last 2 years: Using horizontal analysis, what is the percent change in the Profit Margin ratio for year 2 compared to year 1? (Round profit margin ratios for years 1 and 2 to two decimal places.)
A) The store reported 10.09% change in its profit margin ratio from Year 2 compared to Year 1.
B) The store reported 14.18% change in its profit margin ratio from Year 2 compared to Year 1.
C) The store reported 14.09% change in its profit margin ratio from Year 2 compared to Year 1.
D) The store reported 14.86% change in its profit margin ratio from Year 2 compared to year 1.

Question

The owner of a local pet supply store fears their efforts to increase the store's gross profit and net income are futile. They compiled the following information from their financial statements over the last 2 years:  Using horizontal analysis, what is the percent change in the Profit Margin ratio for year 2 compared to year 1? (Round profit margin ratios for years 1 and 2 to two decimal places.)
A) The store reported 10.09% change in its profit margin ratio from Year 2 compared to Year 1. 
B) The store reported 14.18% change in its profit margin ratio from Year 2 compared to Year 1. 
C) The store reported 14.09% change in its profit margin ratio from Year 2 compared to Year 1. 
D) The store reported 14.86% change in its profit margin ratio from Year 2 compared to year 1.

Quizplus · Accepted Answer

This question requires familiarity with net income and its related financial performance metrics including profit margin and knowledge about how these items are expressed as a percentage of sales. First, calculate the profit margin ratio. The profit margin ratio will equal net income divided by total sales. Year 2's Net Income equals $550,000 - $398,000 - $48,500 = $103,500. Now, divide by sales to determine the percentages using horizontal analysis. $103,500/$550,000 = .1882 or 18.82%. Year 1 Net Income is $520,000 - $450,000 - $49,400 = $20,600. Now, divide that amount by sales to determine its percentage using horizontal analysis. $20,600/$520,000 = .0396 or 3.96%. The percent change is: Percentage in Year 2 - Percentage in Year 1 or 18.82% - 3.96% = 14.86% (Choice D).

The Owner of a Local Pet Supply Store Fears Their