Bob Evans Farms, Inc. operates 568 restaurants in 22 states and produces fresh and fully cooked sausage products, fresh salads, and related products distributed to grocery stores in the Midwest, Southwest, and Southeast. For a recent 3-year period Bob Evans Farms reported the following selected income statement data (in millions of dollars).

_ 2004 _2003—__ 2002 Sales $1,198.0 $1,091.3 $1,061.8 Cost of goods sold 340.8 287.0 298.3 Net income 72.0 oa 67.7 Total assets 868.2 784.6 2220)

In his letters to stockholders, the chief executive officer (CEO) explained the decline in earnings. An excerpt from that letter is shown on page 469.

Broadening Your Perspective 469 BOB EVANS FARMS, INC.

Letter to Stockholders (partial)

During fiscal 2004, we continued building long-term value for Bob Evans stockholders by pursuing our time-tested strategies for steady, complementary growth of our family-casual restaurants and food products. However, financial results for the year were affected primarily by increased commodity costs, which resulted in a slight decline in earnings per share from fiscal 2003’s record level.

SIGE SESE ESSE ats tee SU SDN ENR Ua CoN OD REO Instructions

(a) Compute the percentage change in sales and in net income from 2002 to 2004.

(b) What contribution, if any, did the company’s gross profit rate make to the decline in earnings?

(c) What was Bob Evans's profit margin ratio in each of the 3 years? Comment on any trend in this percentage.

(d) The CEO's letter also stated that the company continued to invest prudently in restaurants, opening 37 new restaurants in 2004, compared to 29 openings in 2003. What effect would you expect this change to have on return on assets? Calculate the company’s return on assets for 2003 and 2004 to see if it reflects the increase in number of stores.

(e) Based on the trends in these ratios, does the CEO’s explanation seem appropriate?