Calculating Return on Assets based on Sales, Profit Margin, and Capital Intensity Ratio

What is the Return on Assets if sales are $211,000, profit margin is 6.3 percent, and the capital intensity ratio is .94?

A. 6.08 percent

B. 6.92 percent

C. 6.39 percent

Answer:

The question involves calculating Return on Assets (ROA) based on sales, profit margin, and capital intensity ratio. On calculation, none of the options A, B, or C matched the answer due to inconsistency in the provided data.

Explanation:

The subject of this question is the calculation of the Return on Assets (ROA). ROA provides insight into how effectively a company is converting the money it has into net income. The formula used to calculate it is: ROA (in percent) = (Net Profit / Total Assets) * 100. Given the information in the question, we first need to calculate the net profit (which is Sales * Profit Margin). With sales of $211,000 and a profit margin of 6.3 percent, the net profit comes out to be $13,293. Now the total assets could be determined through the capital intensity ratio (which is Total Assets/Sales), so Total Assets = Capital intensity * Sales. Given a capital intensity of .94, Total Assets = .94 * $211,000 = $198,340. Using these values in the ROA formula, we find that the Return on Assets is (13,293 / 198,340) * 100 = 6.7, which is not listed in the options. Hence, the given data appears inconsistent.