The annual sales for Salco, Inc. were $4.56 million last year. The firm\'s end-o

Question

The annual sales for Salco, Inc. were $4.56 million last year. The firm's end-of-year balance sheet & Salco's income statement for the year was as follows:

b. Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of $ 1.03 million. The firm will maintain its present debt ratio of 50 percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.7 percent. What will be the new operating return on assets ratio (i.e., net operating income ÷ total assets) for Salco after the plant's renovation?

Current assets $507,000 Liabilities $995,500 Net fixed assets 1484000 Owners' equity 995,500 Total Assets $1,991,000 Total $1,991,000 Sales $4,560,000 Cost of goods sold (3,494,000) Gross profit $1,066,000 Operating expenses (507,000) Net operating income $559,000 Interest expense (106,000) Earnings before taxes $453,000 Taxes (35%) (158,550) Net income $294,450

Explanation / Answer

sales are constant so sales is $ 4,560,000

operating profit margin is 13.7%

so operating profit is = $ 4,560,000*13.7%

=$ 624,720

new total assets is = $ 1,991,000+$ 1,030,000

= $ 3,021,000

return on total assets =net operating income/total assets

=$ 624,720/$ 3,021,000

= 20.68%

  

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