In the recent board meeting it was decided to change the companys provision for warranty policy. The current policy was 5% of annual turnover and the new policy will be 2.5% of annual turnover. The chairman is concerned regarding certain requirements from the bank and is not sure what the effect of this change will be on the relevant ratios of the company.

Required: Advise the chairman what the effect will be on the following ratios. Provide reasons for your answer:

a. Gross profit

b. Net profit

c. Current ratio

d. Acid Test ratio

e. Debt to equity

f. Return on equity