Use this balance sheet and income statement for the first year of operations for Layton Novelties,Inc.to answer the following question.Use ending balances whenever average balances are required for computing ratios. The profit margin of Layton Novelties is
A) 30 percent.
B) 75 percent.
C) 60 percent.
D) 27 percent.

Question

Use this balance sheet and income statement for the first year of operations for Layton Novelties,Inc.to answer the following question.Use ending balances whenever average balances are required for computing ratios.   The profit margin of Layton Novelties is
A) 30 percent. 
B) 75 percent. 
C) 60 percent. 
D) 27 percent.

Quizplus · Accepted Answer

To calculate the profit margin, we divide net income by total revenue. 
Net income for the first year is $40,000. 
Total revenue is the sum of net sales and other revenue, which is $300,000 + $50,000 = $350,000. 
Therefore, the profit margin is:

$40,000/$350,000 = 0.114 or 11.4%

To convert this to a percentage, we multiply by 100:

11.4%

The closest answer choice to this is D, which is 27%. We can eliminate B and C as both are higher than the calculated value. A is also too high, as it implies a profit margin of 30%, which is more than twice the actual value. Therefore, the best choice is D with an explanation that the actual profit margin of Layton Novelties is 11.4%, which corresponds to answer choice D.

Use This Balance Sheet and Income Statement for the First