How does cost cutting at Best Buy impact its ROI? Best Buy is struggling to thri

Question

How does cost cutting at Best Buy impact its ROI? Best Buy is struggling to thrive (and some would say it is even struggling to survive) as it competes with online giant Amazon.com. According to a recent article in Forbes, one way Best Buy is aiming to improve its financial outlook is to cut its cost of goods sold through supply chain efficiency gains.

1. On what financial statement does Cost of goods sold appear? (Hint: It is either the Balance Sheet or the Income Statement.)

2.Assuming everything else remains the same, how will cutting cost of goods sold impact Best Buy’s Return on Investment (ROI)? Explain your answer in terms of the impact on Sales Margin and Capital Turnover.

3.What are other ways Best Buy could improve its ROI?

Explanation / Answer

1) 1. On what financial statement does Cost of goods sold appear?
Cost of good sold appeared in Income statement.
2) ROI = (Capital Turnover Ratio)x (Sales Margin )
Sales margin is the profit that is left over from the sales a firm makes minus the company’s cost of goods sold, selling and administrative expense, depreciation, tax or interest expense.Sales margin = Net income/Sales
Capital turnover is calculated using the firm’s sales figure and divide it by the company’s invested capital. Capital Turnover = sales/ Investment
By Cutting COGS sales margin will increase and that will increase the ROI %.

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