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 Cost of goods sold Gross proft Administrative expenses Income from operations $1,326,000 596,700 $729,300 265,200 5464,100 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 $2,210,000 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 $66,300 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

a.

Profit margin = (Income / Sales) × 100

                        = ($464,100 / $1,326,000) × 100

                        = 35 % (Answer)

Investment turnover = Sales / Invested asset

                                    = $1,326,000 / $2,210,000

                                    = 0.6 (Answer)

DuPont formula is as below:

Return on equity = Profit margin × Investment turnover × Financial leverage

Here equity is equal to invested asset. Therefore, the financial leverage would be as below,

Financial leverage = Total asset / Total equity = $2,210,000 / $2,210,000 = 1

Return of equity = Return on investment = Profit margin × Investment turnover × Financial leverage

                                                                    = 35% × 0.6 × 1

                                                                    = 21% (Answer)

b.

Decreasing expense increases profit margin, since income increases; but investment turnover would be unaffected, since sale is not decreasing.

Profit margin = (Income / Sales) × 100

                        = {($464,100 + $66,300) / $1,326,000} × 100

                        = 40 % (Answer)

Investment turnover = Sales / Invested asset

                                    = $1,326,000 / $2,210,000

                                    = 0.6 (Answer)

DuPont formula is as below:

Return of equity = Return on investment = Profit margin × Investment turnover × Financial leverage

                                                                    = 40% × 0.6 × 1

                                                                    = 24% (Answer)

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