The contribution format income statement for Westex, Inc. for its most recent pe

Question

The contribution format income statement for Westex, Inc. for its most recent period is given below: Total Unit
Sales $1,000,000 $50.00
Variable Exp. 600,000 30.00
Contribution Margin 400,000 20.00
Fixed Exp. 320,000 16.00
Net operating income 80,000 4.00
Income tax (40%) 32,000 1.60
Net income $48,000 $2.40

The company had average operating assets of $500,000 during the period.
Compute the company's return on investment using the ROI formula using the ROI forumua state in terms of margins and turnover.

Explanation / Answer

According to the given information,

Average operating assets = $500,000

The formula for calculating the ROI in terms of Margin and turnover is

ROI = Net operating income / Average operating assets

This can be written as

ROI = (Net Operating income / Sales) * (Sales / Average operating assets)

      = Margin * Turnover

Profit margin = Net Operating income / Sales

Asset turnover ratio = Sales / Average operating assets

First we will calculate the Profit margin ratio

Profit margin = Net Operating income / Sales

                    = $80,000 / $1,000,000

                    = 0.08 or 8%

Therefore, the profit margin is 8%

Now, we have to calculate the Asset turnover ratio.

Asset turnover ratio = Sales / Average operating assets

                               = $1,000,000 / $500,000

                               = 2 times

Substituting the values in the ROI formula, we get

ROI = Profit Margin * Asset Turnover

      = 0.08 * 2

      = 0.16 or 16%

Therefore, the Return on investment in terms of Margin and turnover is 16%

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