Next year, Allgreens expects its sales to reach $33,000. with an investment in t

Question

Next year, Allgreens expects its sales to reach $33,000. with an investment in total assets of $10,750. Net income of $1,225 is anticipated. This year sales were $30,000, total assets were 9,900, and net income was $1,000. Last year , these figures were $28,000, $9,000, and $750.respectively A. Use the Du Pont system to compare Allgreens' anticipated performance against its prior year results. Comment on your findings. B. How would Allgreens compare with the industry if it operates in the same industry as Dayco and if the industry average ratios remain the same over time?

Explanation / Answer

Expected ratios: Profit margin = NI/Sales = $850/$23,000 = 3.70% Total asset turnover = Sales/TA = $23,000/$7,500 = 3.07ROA = NI/TA = $850/$7,500 = 11.33% Profit margin × Total asset turnover = ROA 2005: 3.50% × 3.02 = 10.57% 2006 3.66% × 2.99 = 10.94% next year: 3.70% × 3.07 = 11.33% An increase in ROA is anticipated next year because of a slightly higher profit margin and an increase in asset efficiency. ========================= b. How would Allgreens compare with the industry if the industry ratios remain the same? Allgreens’ higher asset efficiency will balance a below-average profit margin and result in a slightly above-average ROA.

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