Profit Margin, Investment Turnover, and return on investment The condensed incom
ID: 2580221 • Letter: P
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 $3,320,000 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 $99,600 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 $1,992,000 Cost of goods sold 896,400 Gross profit $1,095,600 Administrative expenses 597,600 Income from operations $498,000Explanation / Answer
a.
Income from operations $498,000
Invested assets $3,320,000
Sales $1,992,000
Return on Investment is the return on the assets which is calculated by dividing Income from operations by the Invested assets.
Higher the return on investment, the better the division is using its assets to generate Income.
Return on investment is calculated by the DuPont formula as shown below:
Profit Margin
Profit Margin is the ratio of Income from operations to sales.
Investment turnover is the ratio of sales to invested assets.
Return on Investment is the profit margin multiplied by Investment turnover.
b.
When the expenses will reduce by $99,600 then the Profit Margin will increase but there will be no change in Investment turnover and ROI will also increase.
Particulars Amount ($) Income from operations (a) 498,000 Sales (b) 1,992,000 Profit Margin (a/b) 25.00%Related Questions
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