Fanning Corporation’s balance sheet indicates that the company has $550,000 inve
ID: 2517027 • 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
Calculation of Profit Margin for 2018
Profit Margin = (Net Income/Net Sales)*100
= (60,500/1100000)*100
=5.50%
Fanning's turnover or sales for 2018 = $1,100,000
Return on Investment = (Net Profit / Total Investment)*100
Net profit = Profit Margin * Sales
or, 5.50% * $1,100,000
= $60,500
Total Investment = $550,000
So Return on Investment = ($60,500/$550,000)*100
= 11%
Recomputation of Return on Investment (ROI) in the given cases
Case 1.
Profit Margin = ($67,320/$1,320,000)*100
= 5.10%
Net profit = Profit Margin * Sales
= 5.10%*$1,320,000
= $67,320
Return on Investment = ($67,320/$550,000)*100
= 12.24%
Case 2.
Net Profit = ($62,700./$1,00,000)*100
=5.70%
Net profit = Profit Margin * Sales
= 5.70%*$1,100,000
= $62,700
Return on Investment = ($62,700/$550,000)*100
= 11.40%
Case 3.
Net Profit remains same as specified earlier i.e $60,500
Total Investment = $440,000
Return on Investment = ($60,500/$440,000)*100
= 13.75%
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