Required information [The following information applies to the questions display

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.

£ denotes the British pound sterling, the national monetary unit of Great Britain.

3-a. Assuming that the expenses and cost of goods sold are reduced in order to improve the firm's ROI to 30 percent, compute the firm's new sales margin.

3-b. Show how the new sales margin and the old capital turnover together result in a new ROI of 30 percent.

Sales revenue £ 6,200,000 Cost of goods sold 2,596,000 Operating expenses 3,232,000 Average invested capital 1,550,000

Explanation / Answer

Solution a:

New ROI = 30%

Average Invested capital = 1,550,000 pounds

Operating Profit = 1,550,000*30% = 465,000 pounds

Sales Margin Ration = Operating Profit / Sales Revenue = 465,000/6,200,000 = 7.50%

Solution b:

Old Capital turnover = Turnover / Average Capital = 6,200,000 / 1,550,000 = 4:1

New Sales Margin = 7.50%

New ROI = Old capital turnover * New Sales Margin = 4 * 7.5 = 30%

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