Question

The T-Shirt Hut successfully managed to reduce its general and administrative costs this year. This will increase which ratio?

I. Profit margin
II. ROA
III. Total Asset Turnover
IV. ROE

A. I and II only
B. I and III only
C. II, III, and IV only
D. I,II, and IV only
E. I, II,III, and IV

Answer 1

Reducing general and administrative costs will improve The T-Shirt Hut's profit margin, ROA, and ROE, but not directly impact Total Asset Turnover. Therefore, the ratios that will increase are Profit Margin, ROA, and ROE.

Step-by-step explanation:

When The T-Shirt Hut reduces its general and administrative costs, it will directly affect certain financial ratios. The profit margin will increase because with lower general and administrative expenses, the net income as a percentage of sales will improve. The Return on Assets (ROA) will also increase because the net income is higher while the asset base may remain the same. However, reducing general and administrative costs does not directly impact the Total Asset Turnover, which measures the efficiency of a company's use of its assets to generate sales revenue.

Return on Equity (ROE) would likely increase as well since it measures a company's profitability in generating profits from its shareholders' investments, and lower costs mean higher profits. Therefore, the correct answer is D. I, II, and IV only. This is because the reduction in costs boosts profitability which increases both profit margin and ROA, and since ROE is dependent on net income, it will increase as well.