Shonrock International is considering a significant expansion to its product lin
ID: 2448228 • Letter: S
Question
Shonrock International is considering a significant expansion to its product line. The sales force is excited about the opportunities that the new products will bring. The new products are a significant step up in quality above the company's current offerings, but offer a complementary fit to its existing product line. Richard Farley, senior production department manager, is very excited about the high-tech new equipment that will have to be acquired to produce the new products. Donna Beson, the company's CFO, has provided the following projections based on results with and without the new products.
Without New Products
With New Products
Instructions
Compute the company's return on assets, profit margin, and asset turnover, both with and without the new product line.
Discuss the implications that your findings in part (a) have for the company's decision.
Without New Products
With New Products
Sales revenue $10,000,000 $16,000,000 Net income $500,000 $960,000 Average total assets $5,000,000 $12,000,000Explanation / Answer
(a) Computation of ratios required Without New Products With New Products Return on Assets Net Income (A) 5,00,000 9,60,000 Average Total Assets (B) 50,00,000 1,20,00,000 Return on Assets % (A) / (B) 10% 8% Profit Margin Net Income (A) 5,00,000 9,60,000 Sales Revenue (B) 1,00,00,000 1,60,00,000 Profit Margin % (A) / (B) 5% 6% Asset Turnover Ratio Average Total Assets (A) 50,00,000 1,20,00,000 Sales Revenue (B) 1,00,00,000 1,60,00,000 Asset Turnover (A)/(B) 0.50 0.75 (b) According to my understanding of the ratios, the new product line can be introduced even if the margin increases by only 1%. This is because in the long run, the Company will have a higher amount of total assets against which its capital base can be structured, and also the sales revenue increases on introducing the new product line by 60%.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.