v2.cengagenow.com Print Item Profit Margin, Investment Turnover, and return on i

Question

v2.cengagenow.com Print Item Profit Margin, Investment Turnover, and return on investment The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department charges): Sales Cost of goods sold Gross profit Administrative expenses 394,500 Income from operations $473,400 The manager of the Consumer Products Division is considering ways to increase the return on investment. $1,578,000 710,100 $867,900 a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that $2,630,000 of assets have been invested in the Consumer Products 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 $78,900 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division? Round the investment turnover to one decimal place. Profit margin Investment turnover Rate of return on investment %

Explanation / Answer

Part-a Du Pont Formula = (Net Income / Sales ) * (Sales / Investment in assets) (Net Income / Sales ) = Profit Margin (Sales / Investment in assets) = Invstment Turnover Profit Margin = $473400 / $1578000 = 30% Investment Turnover = $1578000 / $2630000= 0.6 Return On investment = 30% * 0.6= 18% Part-b When Expenses Decrease by $78900 , net income ( $473400+ $78900) = $552300 Profit Margin = $552300/ 1578000 = 35% Investment Turnover stays the same i.e.0.6 Return on investment = 0.6 * 35% = 21%

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