Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below. The following data pertain to British Isles Aggregates Company, a producer of sand, gravel, and cement, for the year just ended. Sales revenue Cost of goods sold Operating expenses Average invested capital £6,650,000 2,499,000 3,685,500 1,330,000 E denotes the British pound sterling, the national monetary unit of Great Britain. Required Compute the company's sales margin, capital turnover, and RO Sales margin Capital turnover ROI

Explanation / Answer

1). Sales                   6650000
Less: COGS             2499000
Gross margin            4151000
Less: Operating Exp    3685500
Profit                             465500

Sales margin = 466500/6650000 = 0.07 or 7%
Capital Turnover= Revenue/Invested capital = 6650000/1330000 = 5
ROI = Profit / Invested Capital = 465500/1330000 = 0.35 or 35%

2). If Sales and invested capital remains same and target ROI is 40% then:
Profit must be = 1330000*40% = 532000
Total expenses must be = Sales - Profit = 6650000-532000 = 6118000
Current Expenses = 2499000+3685500 = 6184500
Reduction in expenses required = 6184500 - 6118000 = 66500

3). New sales margin when the cost of goods sold and expenses are reduced to 6118000 for ROI to be 40%
Profit = 532000
New sales margin = 532000 / 6650000 = 0.08 or 8%

4). New sales margin and old capital turnover result in new ROI of 40% i.e
New sales margin * Capital turnover = ROI
8% * 5 = 40%

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