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 Cost of goods sold Gross profit Administrative expenses 175,200 Income from operations $306,600 The manager of the International Division is considering ways to increase the rate of return on investment. $876,000 394,200 $481,800 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 $1,460,000 of assets have been invested in the International Division. Round the investment turnover to one decimal place. Profit margin Investment turnover Rate of return on investment b. If expenses could be reduced by $43,800 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 the investment turnover to one decimal place. Profit margin Investment turnover Rate of return on investment

Explanation / Answer

a) Profit margin = Income from operation / sales

=306600/876000

=35%

Investment turnover = sales/Investment

=876000/1460000

=0.6

Rate on return on investment = Profit/Investment

=306600/1460000

=21%

B) if expense is reduced by 43800 then profit will increase by same amount

new profit = 306600+43800 = 350400$

Profit margin = 350400/876000

39.99% ie 40%

Investment turnover will remain the same

Rate of return on investment = 350400/1460000

=23.99% ie 24%

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