Using the Strategic Profit Model construct a model (Hint: a good application for

ID: 468485 • Letter: U

Question

Using the Strategic Profit Model construct a model (Hint: a good application for Excel).

a. Calculate the Net Profit Margin, Asset Turnover and Return on Assets using:

b. What is the maximum allowable Inventory level before Return of Asset equals 0.05

please the answer should be clear and all steps must be shown thanks

$ thousands Sales 1000 Cost of Goods Sold 700 Variable Expenses 60 Fixed Expenses 120 Inventory 50 Accounts Receivable 100 Other Current Assets 150 Fixed Assets 1500

Explanation / Answer

Question - A

Sales

1000

Cost of Goods Sold

700

Variable Expenses

Fixed Expenses

120

Inventory

Accounts Receivable

100

Other Current Assets

150

Fixed Assets

1500

Net Profit = Sales – Cost of Good sold – Fixed expenses – variable expenses

Net Profilt

Sales - All Expenses

120

Net Profilt Margin

Net Profit/Sales

12.00%

Asset turnover rato = Total Sales/ Total asset

Total Asset = (inventory+ recievable+ current asset+ fixed assets)

Asset Turnover Ratio

Sales Revenue/Total Asset

55.56%

Return on Asset = Net profit/Total Asset

Return on Asset

Net Profit/ Total Asset

6.667%

Question – B

Desired retun on Asset = 5%

Net Profit / Total Asset = 5%

120 / Total Asset = 5%

Total Asset = 120/ 5%= 2400

For a desired return on asset of 5%, maximum asset can be maintained is 2400

Deducting other assets (Recievable, Current asset and fixed asset) will give us maximum inventory that can be maintained

Inventory = 2400 – 1500 – 100 – 150 = 650