Lebo Company and Ritter Corporation, two corporations of roughly the same size, are both involved in the manufacture of in line skates. Each company depreciates its plant assets using the straight line approach. An investigation of their financial statements reveals the following information.
|
Lebo Co. |
Ritter Corp. |
|
|
Net income |
$ 800,000 |
$1,000,000 |
|
Sales |
1,200,000 |
1,080,000 |
|
Average total assets |
2,500,000 |
2,000,000 |
|
Average plant assets |
1,800,000 |
1,000,000 |
Instructions
(a) For each company, calculate the asset turnover ratio.
(b) Based on your calculations in part (a), comment on the relative effectiveness of the two companies in using their assets to generate sales and produce net income.