Profit Margin, Investment Turnover, and return on investment The condensed incom

Question

Profit Margin, Investment Turnover, and return on investment

The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department charges):

The manager of the Consumer Products Division is considering ways to increase the return on investment.

a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that $1,340,000 of assets have been invested in the Consumer Products Division. Round the investment turnover to one decimal place.

b. If expenses could be reduced by $40,200 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division? Round the investment turnover to one decimal place.

Sales $804,000 Cost of goods sold 361,800 Gross profit $442,200 Administrative expenses 241,200 Income from operations $201,000

Explanation / Answer

Part A

ROI = profit margin X investment turnover

Profit margin = income from operations÷sales = 201000÷804000 =0.25

Investment turnover= sales÷invested capital= 804000÷1340000=0.6

ROI =( income from operations÷sales) X (sales÷invested assets) =(201000÷804000) × (804000÷1340000)=25%*0.6=15%

Part B

Profit margin= income from operations÷sales = (201000+40200)÷804000=30%

Investment turnover= invested assets÷sales= 804000÷1340000=0.6

ROI = profit margin X investment turnover= 30%*0.6 =18%

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