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chapter 24.docx

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University of Calgary
ACCT 301

Chapter 24 Gross Profit Margin = Gross Profit X 100 Sales 1. Since all costs that are deducted when computing the gross profit are directly variable with sales, it is assumed that the gross profit margin should remain unchanged. 2. Yet this view is less popular for a manufacturer because the COGS includes fixed costs such as factory lighting and heating, factory rent and rates, and semi-variable costs. 3. The change may occur due to: Price cuts, cost increases, changes in mix, under- or overvaluation of stocks. Net Profit Percentage = Net Profit before interest and tax X100 Sales 1. It is designed to focus attention on the net profit margin arising from business operations. 2. Net profit, like gross profit, increases with sales, and this increase occurs as a percentage of sales. Rate of Return on Gross Assets = Net profit before interest and tax X 100 Avg Gross Assets (Total Assets less Current Liabilities) Or = Total Asset Turnover x Net Profit Percentage Sales X Profit Before Interest & Tax Capital Employed Sales 1. Also known as the Rate of Capital Employed, Shareholder's Equity, Long-Term Capital Employed. 2. It measures the extent at which the management makes the most effective use of available resources 3. Since Total Asset Turnover multiplied by the Net Profit Percentage is equivalent to the Return on Gross Assets, one must note that lower asset utilization must be compensated by the profit margins, or vice versa, to effectively manage the Rate on Gross Assets. This is why this ratio is described as the primary accounting ratio. Therefore, it may be necessary to calculate the asset turnover ratio and the net profit margin to find out why the ROCE is high or low. 4. As such there’s a tradeoff between the net profit percentage and the total asset turnover, the reasons being, a high net profit percentage, means a higher price per unit, which may not generate a high number of sales, hence, a lower asset turnover. Rate of Return on Shareholder's Equity = Earning (Pre or Post) X 100 Avg. shareholder's Equity (Share Capital + Reserves) 1. Measures
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