Fanning Corporation’s balance sheet indicates that the company has $550,000 inve
ID: 2516095 • Letter: F
Question
Fanning Corporation’s balance sheet indicates that the company has $550,000 invested in operating assets. During 2018, Fanning earned operating income of $60,500 on $1,100,000 of sales.
Required
Compute Fanning’s profit margin for 2018.
Compute Fanning’s turnover for 2018.
Compute Fanning’s return on investment for 2018.
Recompute Fanning’s ROI under each of the following independent assumptions:
(1) Sales increase from $1,100,000 to $1,320,000, thereby resulting in an increase in operating income from $60,500 to $67,320.
(2) Sales remain constant, but Fanning reduces expenses, resulting in an increase in operating income from $60,500 to $62,700.
(3) Fanning is able to reduce its invested capital from $550,000 to $440,000 without affecting operating income.
Explanation / Answer
Answer a.
Sales = $1,100,000
Operating Income = $60,500
Profit Margin = Operating Income / Sales
Profit Margin = $60,500 / $1,100,000
Profit Margin = 5.50%
Answer b.
Sales = $1,100,000
Operating Assets = $550,000
Turnover = Sales / Operating Assets
Turnover = $1,100,000 / $550,000
Turnover = 2 times
Answer c.
Turnover = 2 times
Profit Margin = 5.50%
ROI = Turnover * Profit Margin
ROI = 2 * 5.50%
ROI = 11.00%
Answer d-1.
Sales = $1,320,000
Operating Income = $67,320
Profit Margin = Operating Income / Sales
Profit Margin = $67,320 / $1,320,000
Profit Margin = 5.10%
Operating Assets = $550,000
Turnover = Sales / Operating Assets
Turnover = $1,320,000 / $550,000
Turnover = 2.40 times
ROI = Turnover * Profit Margin
ROI = 2.4 * 5.10%
ROI = 12.24%
Answer d-2.
Sales = $1,110,000
Operating Income = $62,700
Profit Margin = Operating Income / Sales
Profit Margin = $62,700 / $1,110,000
Profit Margin = 5.65%
Operating Assets = $550,000
Turnover = Sales / Operating Assets
Turnover = $1,100,000 / $550,000
Turnover = 2.00 times
ROI = Turnover * Profit Margin
ROI = 2.0 * 5.65%
ROI = 11.30%
Answer d-3.
Sales = $1,100,000
Operating Income = $60,500
Profit Margin = Operating Income / Sales
Profit Margin = $60,500 / $1,100,000
Profit Margin = 5.50%
Operating Assets = $440,000
Turnover = Sales / Operating Assets
Turnover = $1,100,000 / $440,000
Turnover = 2.50 times
ROI = Turnover * Profit Margin
ROI = 2.50 * 5.50%
ROI = 13.75%
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