5. Profit Margin, investment turnover, and rate of return on investment The divi

Question

5. Profit Margin, investment turnover, and rate of return on investment

The divisional income statements for three divisions of the McLaren company are show.

                          McLaren Company

                       Divisional Income statements

                   For the Year ending December 31,2013

Additional financial data from the three divisions of the McLaren company are shown.

Please complete the follwoing four questions:

A. Calculate the profit margin and the investment turnover for each division. Round profit margin to the nearest tenth of a percent for example, 14.6% and investment turnover to two decimal places for example, 0.82.

b. Using the profit margins and investment turnovers, calculate the rate of return on investment for each division using the DuPont formula. Round the rate of return on investment to the nearest hundredth of percent for example, 16.94%.

C. The division showing the highest operating profitablity is Division __________.

D. The division showing the highest operating efficiency is Division_______.

Divsion A Division B Division C Revenues $960,000 $900,000 $320,000 Operating expense 564,500 675,000 170,000 Income from operation before service department charges $395,500 $225,000 $150,000 Service department charges 275,500 135,000 70,000 Income from Operations $120,000 $90,000 $80,000

Explanation / Answer

C. Since the operating margin % is highest @46.9%, division C is the highest profitability.

D. The division showing the highest operating efficiency is Division "A" as the return on investment is 39.55% as calculated in section B above.

A Profit Margin i.e Operating margin Divsion A Division B Division C Revenue Less operating expenses 395,500 225,000 150,000 Profit Margin Ratio = Operating margin/ revenue x 100 41.2% 25.0% 46.9% Investment Turnover ratio = Turnover / Investments 0.96 1.50 0.80

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