Forchen, Inc., provided the following information for two of its divisions for l

Question

Forchen, Inc., provided the following information for two of its divisions for last year:

_______________Small Appliances Division___________________ Cleaning Products Division

Sales _______________$41,604,000__________________________ $23,200,000

Operating income _______3,328,320___________________________ 928,000

Operating assets, January 1 __6,394,000 ________________________5,600,000

Operating assets, December 31 7,474,000________________________ 6,000,000

Required:

1. For the Small Appliances Division, calculate:

a. Average operating assets $________

b. Margin_________ %

c. Turnover_________

d. Return on investment (ROI)__________ %

2. For the Cleaning Products Division, calculate:

a. Average operating assets $_________

b. Margin_________ %

c. Turnover_________

d. Return on investment (ROI)__________ %

3. What if operating income for the Small Appliances Division was $2,080,200? How would that affect average operating assets? Margin? Turnover? ROI? Calculate any changed ratios. When required, round the percent to four decimal places before converting to a percentage. For example, .88349 would be rounded to .8835 and entered as 88.35. Enter "0", where ever required.

Average operating assets___________ Unaffected by__________ %

Margin_____________ Lower by______________ %

Turnover__________ Unaffected by_____________ %

Return on investment (ROI)_________ Lower by_________ %

Explanation / Answer

Solution 1:

Small Appliances divison:

Average operating assets = (Beginning operating assets + Ending operating assets)/2 = ($6,394,000 + $7,474,000)/2

= $6,934,000

Margin = Operarting income / Sales = $3,328,320 / $41,604,000 = 8%

Asset Turnover = Sales / Average operating assets = $41,604,000 / $6,934,000 = 6 times

Return on investment = Operating income / Average operating assets = $3,328,320 / $6,934,000 = 48%

Solution 2:

Cleaning Products divison:

Average operating assets = (Beginning operating assets + Ending operating assets)/2 = ($5,600,000 + $6,000,000)/2

= $5,800,000

Margin = Operarting income / Sales = $928,000 / $23,200,000 = 4%

Asset Turnover = Sales / Average operating assets = $23,200,000 / $5,800,000 = 4 times

Return on investment = Operating income / Average operating assets = $928,000 / $5800,000 = 16%

Solution 3:

Small Appliances divison: If Net Operating income is $2,080,200

Average operating Assets = $6,934,000, therefore unaffected

Margin = $2,080,200 / $41,604,000 = 5%, Lower by 3%

Asset Turnover = Sales / Average operating assets = $41,604,000 / $6,934,000 = 6 times, therefore unaffected

Return on investment = $2,080,200 / $6,934,000 = 30%, lower by 18%

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