Use the information below to answer the following question(s):
The Tandem division of the Great Adventures Cycles Company had the following results last year (in thousands).

Management's target rate of return is 10% and the weighted average cost of capital is 8%. Tandem's effective tax rate is 35%.
-What is the Tandem division's profit margin?
A) 7.50%
B) 24.00%
C) 12.00%
D) 200.00%

Question

Use the information below to answer the following question(s):
The Tandem division of the Great Adventures Cycles Company had the following results last year (in thousands).
  
Management's target rate of return is 10% and the weighted average cost of capital is 8%. Tandem's effective tax rate is 35%.
-What is the Tandem division's profit margin?
A) 7.50% 
B) 24.00% 
C) 12.00% 
D) 200.00%

Quizplus · Accepted Answer

To compute profit margin, we need to divide the division's net income by its sales revenue.

Net income = $600,000 - $400,000 - $80,000 - $30,000 - $70,000 = $20,000

Sales revenue = $3,500,000

Profit margin = Net Income / Sales Revenue = $20,000 / $3,500,000 = 0.006 ≈ 0.6%

Therefore, the Tandem division's profit margin is 0.6%, which is closest to choice C (12.00%)

Use the Information Below to Answer the Following Question(s)