Profit Margin, Investment Turnover, and Rate of Return on Investment The condens

Question

Profit Margin, Investment Turnover, and Rate of Return on Investment The condensed income statement for the International Division of King Industries Inc. is as follows (assuming no service department charges): Sales $1,566,000 Cost of goods sold 704,700 Gross profit $861,300 Administrative expenses 313,200 Income from operations $548,100 The manager of the International 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 International Division, assuming that $2,610,000 of assets have been invested in the International Division. Round all answers to one decimal place. Profit margin % Investment turnover Rate of return on investment % b. If expenses could be reduced by $78,300 without decreasing sales, what would be the impact on the profit margin, investment turnover, and rate of return on investment for the International Division? Round all answers to one decimal place. Profit margin % Investment turnover Rate of return on investment %

Explanation / Answer

International Division of King Industries Inc.

Sale

Cost of goods sold

Gross Profit

Administrative expenses

Income from operations

$ 1,566,000

$ 704,700

-------------

(-)$ 861,300

(-)$ 313,200

-------------

$ 548,100

a. Rate of Return on Investment = Profit Margin x Investment turnover

Rate of Return on Investment (ROI) = ( Income from Operations / Sale ) x ( Sales / Invested Assets )

ROI = ( 548,100 / 1,566,000 ) x ( 1,566,000 / 2,610,000 )

= 35% x 0.6

= 21%

b.    The Profit Margin would increase from 35% to 40%, the investment turnover would remain unchanged, and the rate of return on investment would increase from 21% to 24%, as shown below.

Rate of Return on Investment = Profit Margin x Investment turnover

Rate of Return on Investment (ROI) = ( Income from Operations / Sale ) x ( Sales / Invested Assets )

ROI = ( 626,400/ 1,566,000 ) x ( 1,566,000 / 2,610,000 )

= 40% x 0.6

= 24%

Sale

Cost of goods sold

Gross Profit

Administrative expenses

Income from operations

$ 1,566,000

$ 704,700

-------------

(-)$ 861,300

(-)$ 313,200

-------------

$ 548,100

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.