Step-by-step explanation:
Calculation of profitability ratios for Apple for year ending September 2020:
a. Gross Profit Margin Ratio = (Revenue – Cost of Sales)/Revenue
Gross Profit Margin Ratio = (275 – 170)/275
Gross Profit Margin Ratio = 35.63%
b. Net Profit Margin Ratio = Net Income/Revenue
Net Profit Margin Ratio = (275 – 170 – 39)/275
Net Profit Margin Ratio = 25.45%
c. Return on Investment/Assets = Net Income/Total Assets
Return on Investment/Assets = 57.41 billion/324 billion
Return on Investment/Assets = 17.72%
Analysis of change in profitability for Apple between 2019 and 2020:
Apple’s gross profit margin ratio decreased from 39.3% in 2019 to 35.63% in 2020, indicating that the company was less efficient in controlling the costs associated with its revenue-generating activities.
Similarly, Apple’s net profit margin ratio also decreased from 27.4% in 2019 to 25.45% in 2020, indicating that the company’s profitability decreased, even though it was still making a considerable profit relative to its revenue.
The return on investment/assets ratio decreased from 20.7% in 2019 to 17.72% in 2020, indicating that the company was less efficient in generating profit from its invested assets.
Effects of independent transactions/changes on the profitability ratios:
a. Apple pays $10 billion in cash for an enormous new manufacturing facility in the United States to avoid tariffs on imported phones
The gross profit margin ratio will likely decrease, as the company is spending more on capital assets, which would reduce the revenue available for other purposes.
The net profit margin ratio may also decrease because of increased expenses, which would affect Apple's profitability.
The return on investment/assets ratio may increase or decrease, depending on the success of the new manufacturing facility. If the facility generates significant revenue and profit, it could boost the company's ROI/A. However, if it proves to be a drain on resources, it could negatively impact the ratio.
b. Costs for Apple’s phones stay the same as in 2020, but Apple is forced to reduce the selling price of phones by 10% in 2021 because of competition
The gross profit margin ratio will decrease, as the revenue generated by the sale of iPhones will be reduced.
The net profit margin ratio will also likely decrease because of the reduced revenue.
The return on investment/assets ratio may decrease if the reduced selling price does not generate enough revenue to offset the expenses associated with producing the iPhones.
c. Apple cuts its research and development expense by 20%, but that does not change its sales or any of their other costs to make their products.
The gross profit margin ratio may increase slightly due to the reduction in expenses.
The net profit margin ratio may increase significantly, as the reduction in expenses could significantly improve Apple's profitability.
The return on investment/assets ratio may increase, as the reduction in expenses could improve the company's overall profitability and make it more efficient in generating profits from its invested assets.