Tony's Terrible Towel is a small manufacturer located in the mid-west. Selected data are provided in the table below:
EARNINGS & EXPENSES
Sales ------------------------------ $4,250,000
Merchandise Costs ----------- $ 3,208,750
Net Income --------------------- $ 184,918
SELECTED BALANCE SHEET ITEMS
Merchandise Inventory $ 2,567,000
Total Assets $ 3,400,000
What effect would a 5% reduction in merchandise costs have on Tommy's profit margin and return on assets? Further, by how much would sales have to increase to achieve the same improvement in net income as created by the 5% reduction in merchandise costs?