Profit Margin, Investment Turnover, and Rate of Return on Investment The condens
ID: 2450866 • Letter: P
Question
Profit Margin, Investment Turnover, and Rate of Return on Investment
The condensed income statement for the Consumer Products Division of Bantastic Industries Inc. is as follows (assuming no service department charges):
Sales
$16,000,000
Cost of goods sold
11,660,000
Gross profit
$ 4,340,000
Administrative expenses
2,100,000
Income from operations
$ 2,240,000
The manager of the Consumer Products Division is considering ways to increase the rate of return on investment.
a. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment of the Consumer Products Division, assuming that $8,000,000 of assets have been invested in the Consumer Products Division. If required, round the investment turnover to one decimal place.
Profit margin
%
Investment turnover
Rate of return on investment
%
b. If expenses could be reduced by $320,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and rate of return on investment for the Consumer Products Division? If required, round the investment turnover to one decimal places.
Profit margin
%
Investment turnover
Rate of return on investment
%
Explanation / Answer
Answer:a Profit Margin=(Profit/Sales)*100
=($ 2,240,000/$16,000,000)*100
=14%
Investment Turnover ratio=(Sales/Total Investment)
=($16,000,000/$8,000,000)
=2 times
Rate of return on investment=(Income from operations/Total Investment )*100
=(2240000/8000000)*100
=28%
Answer:b If expenses could be reduced by $320,000 without decreasing sales than income from operations is increased by 320000
than new income from operation =2240000+320000=2560000
Profit Margin=(Profit/Sales)*100
=($ 2,560,000/$16,000,000)*100
=16%
Investment Turnover ratio=(Sales/Total Investment)
=($16,000,000/$8,000,000)
=2 times
Rate of return on investment=(Income from operations/Total Investment )*100
=(2560000/8000000)*100
=32%
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