Question

Database Systems is considering expansion into a new product line. Assets to support expansion will cost $750,000. It is estimated that Database Systems can generate $2,150,000 in annual sales, with an 7 percent profit margin. What would net income and return on assets (investment) be for the year?

Answer 1

Answer:

The net income margin formula = Sales Revenue * Net Profit Percentage

Net Income Margin = $2,150,000 * 7% = $150,500

Return On Assets = Net Profit / Investment

Return On Assets = $150,500 / $750,000 = 20%

Explanation:

The Net Income margin tells us that how much of the total sales is profit that can be distributed to shareholders. Whereas the return on assets tells us the percentage of the investment is generating profits which is return earned on investment.