Question

Q. 1. Q. 1. The Second Quarter Report of a company gives following information about Segment

Performance:

Segment Sales (`) Net Profit (`)

Clothes 10,00,000 40,000

Machine 30,00,000 1,60,000

Footwear 16,00,000 60,000

Use Ratio Analysis, comment on the following:

(i) Which is the best segment?

(ii) If the company has to discontinue one segment, which segment should be

discontinued?​

Answer 1

Answer:

(i) To determine which segment is the best, we will use ratio analysis. Ratio analysis is the process of calculating and interpreting financial ratios to evaluate the performance of a company. By looking at ratios, we can compare the performance of different segments and make a decision about which one is the best.

In this case, we will use the profit margin ratio, which looks at the net profit of each segment compared to the segment sales. The profit margin ratio for Clothes is 40,000/10,00,000 = 4%, for Machine is 1,60,000/30,00,000 = 5.33%, and for Footwear is 60,000/16,00,000 = 3.75%. Therefore, the best segment is the Machine segment, since it has the highest profit margin.

(ii) If the company has to discontinue one segment, the best choice would be the Footwear segment. This is because it has the lowest profit margin of all the segments at 3.75%. This means that the Footwear segment is not performing as well as the other two segments, and it is likely to be the least profitable. Therefore, if the company has to discontinue one segment, the Footwear segment should be chosen.

For more information related to net profit :

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