Question

Net income divided by net sales is the:

O Current ratio.
O Total asset turnover ratio.
O Profit margin ratio.
O Return on total assets ratio.
O Days' sales in inventory ratio.

Answer 1

The profit margin ratio is the result of dividing net income by net sales, reflecting the company's financial efficiency in generating profit per dollar of sales. The correct answer is option 3.

Step-by-step explanation:

Net income divided by net sales is known as the profit margin ratio. This ratio measures how much profit a company makes for every dollar of sales and is an important indicator of the company's financial health. Understanding this ratio can help determine the effectiveness of the company's pricing strategy, cost control, and production efficiency.

Accounting profit is the total revenues minus explicit costs, including depreciation. When we talk about average profit, it refers to profit divided by the quantity of output produced, which is also recognized as the profit margin.

To put it into context, if a firm is experiencing economies of scale, the long-run average cost of producing output decreases as total output increases, potentially enhancing the profit margin ratio.