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 $2,016,000

Cost of goods sold 907,200

Gross profit $1,108,800

Administrative expenses 604,800

Income from operations $504,000

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 $3,360,000 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 $100,800 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

sales 2016000 COGS 907200 gross margin 1108800 admin expenses 604800 operating income 504000 a profit margin = operating income/sales 25% ie =(504000/2016000) investment turnover = sales/assets 0.6 ie= (2016000/3360000) ROI = operating income/operating assets 15% ie =(504000/3360000) b sales 2016000 COGS 907200 gross margin 1108800 admin expenses 504000 operating income 604800 profit margin = operating income/sales 30% ie =(604800/2016000) investment turnover = sales/assets 0.6 ie= (2016000/3360000) ROI = operating income/operating assets 18% ie =(604800/3360000)

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