If a firm has total sales of $50,000 and a profit of $10,000, its profit-to-sales ratio is 10,000/50,000 = .20. Suppose you want to compute the average profit-to-sales ratio for three firms that make up a particular industry. Firm A has sales of $20,000 and a profit-to-sales ratio of .22. Firm B has sales of $50,000 and a ratio of .14. Firm C has sales of $10,000 and a ratio of .27. Compute the
a. Simple average of the profit-to-sales ratios for the three firms.
b. Weighted average of the three profit-to-sales ratios, using individual firm sales as the weights. (This has the effect of dividing total profits by total sales to produce the average and gives the larger firms greater weight. This weighted average would be a better measure of the industry wide profit-to-sales ratio than the simple average in part a.)