[Anonymous]

It’s been awhile since I’ve taken an algebra class and this solution isn’t making since to me. Why do the sales cancel out? My answer gives me B when you take the formula Return on assets = (Profit margin on sales × sales) ÷ (Sales ÷ Asset turnover) and you solve for return on assets as your x.

Select Co. had the following current-year financial statement relationships:

Asset turnover 5

Profit margin on sales 0.02

What was Select’s current-year percentage return on assets?

A.

0.1%

Incorrect B.

0.4%

C.

2.5%

D.

10.0%

Consider the following relationships:

Profit margin on Sales = Income ÷ Sales or Income = Profit margin on sales × Sales

Asset turnover = Sales ÷ Assets or Assets = Sales ÷ Asset turnover

Return on assets = Income ÷ Assets

In expanded fashion:

Return on assets = (Profit margin on sales × sales) ÷ (Sales ÷ Asset turnover) or (Profit margin on sales × Sales × Asset turnover) ÷ Sales

Since Sales cancels out:

Return on assets = Profit margin on sales x Asset turnover

= .02 x 5

= .10 or 10%

Thanks for your help.