The condensed income statement for the International Division of King Industries
ID: 2571181 • Letter: T
Question
The condensed income statement for the International Division of King Industries Inc. is as follows (assuming no service department charges):
Sales $2,480,000
Cost of goods sold 1,116,000
Gross profit $1,364,000
Administrative expenses 868,000
Income from operations $496,000
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 $3,100,000 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 $124,000 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
a. Rate of return on investment= Profit Margin × Investment Turnover
Rate of return on investment= Income from operations/Sales × Sales/Invested Assets
ROI=$496,000/$2,480,000 x $2,480,000/$3,100,000
ROI=20% × 0.8
ROI=16%
b. The profit margin would increase from 20% to 25%, the investment turnover would remain unchanged, and the rate of return on investment would increase from 16% to 20%, as shown below.
Rate of return on investment= Profit Margin × Investment Turnover
Rate of return on investment= Income from operations/Sales× Sales/Invested Assets
ROI=$620,000/$2,480,000 × $2,480,000/$3,100,000
ROI=25% × 0.8
ROI=20%
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