Use the information in E13-3 to complete the following requirements.

Required:

1. Compute the gross profit percentage for each year (one decimal place). Assuming that the change for 2007 to 2008 is the beginning of a sustained trend, is Computer Tycoon likely to earn more or less gross profit from each dollar of sales in 2009?

2. Compute the net profit margin for each year (expressed as a percentage with one decimal place). Given your calculations here and in requirement 1, explain whether Computer Tycoon did a better or worse job of controlling operating expenses in 2008 relative to 2007.

3. Computer Tycoon reported average net fixed assets of \($54,200\) in 2008 and \($45,100\) in 2007. Compute the fixed asset turnover ratios for both years (round to two decimal places). Did the company better utilize its investment in fixed assets to generate revenues in 2008 or 2007?

4. Computer Tycoon reported average stockholders’ equity of \($54,000\) in 2008 and \($40,800\) in 2007. Compute the return on equity ratios for both years (expressed as a percentage with one decimal place). Did the company generate greater returns for stockholders in 2008 than in 2007?

Data from E13-3

According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 20.9 percent between 2007 and 2008. Let’s see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2008.

Transcribed Image Text:

2008 2007 Sales Revenues $98,913 $121,761 Cost of Goods Sold 59,249 71,583 Gross Profit 39,664 50,178 Selling, General, and Administrative Expenses 36,943 36,934 Interest Expense 565 474 Income before Income Tax Expense 2,156 12,770 Income Tax Expense 1,024 5,540 Net Income $ 1,132 $ 7,230