Widget Co and Tools Inc -Which of the Following Statements Best Explains the Difference in Industry

question 32

Multiple Choice

Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data:
$\begin{array}{lll}&\text { Widget Co. }&\text { Tools Inc. }\\\text { Net operating assets/common equity } & 1.37 & 1.53 \\\text { Net operating profit margin } & 19 \% & 21 \% \\\text { Income tax rate } & 47 \% & 28 \% \\\text { Revenues/net operating assets } & 0.81 & 0.61 \\\text { EBIT/revenues } & 38 \% & 32 \%\end{array}$
-Which of the following statements best explains the difference in observed net operating asset turnover?

• A)Widget Co's lower financial leverage
• B)Widget Co uses FIFO and Tools uses LIFO
• C)Widget Co's lower tax rate
• D)Widget Co has significant operating leases and Tool Inc. has no leases

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Definitions:

Predetermined Overhead Rate

This rate is calculated before the period begins and is used to apply manufacturing overhead costs to products based on a consistent formula.

Fixed Manufacturing Overhead

Costs in manufacturing that do not vary with the level of production, including factory rent, salaries of permanent staff, and equipment depreciation.

Machine-Hours

A measure of the amount of time machines are operated in the manufacturing process, used as a basis for allocating costs.

Predetermined Overhead Rate

A rate calculated before a period begins, used to allocate manufacturing overhead costs to products based on a selected activity base such as labor hours or machine hours.