The condensed income statement for the International Division of King Industries
ID: 2572811 • Letter: T
Question
The condensed income statement for the International Division of King Industries Inc. is as follows (assuming no service department charges):
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 $2,480,000 of assets have been invested in the International Division. Round all answers to one decimal place.
b. If expenses could be reduced by $74,400 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 all answers to one decimal place.
Sales $1,488,000 Cost of goods sold 669,600 Gross profit $818,400 Administrative expenses 446,400 Income from operations $372,000Explanation / Answer
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 $2,480,000 of assets have been invested in the International Division. Round all answers to one decimal place.
Profit margin = Net Income / Sales
.....................= $372,000 / $1,488,000
.....................= 25%
Investment turnover = Sales / Investment
.................................= $1,488,000 / $2,480,000
.................................= 0.6
Rate of return on investment = (net profit margin) x (asset turnover)
..............................................= 25% x 0.6
..............................................= 15%
b. If expenses could be reduced by $74,400 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 all answers to one decimal place
Profit margin = Net Income / Sales
.....................= $446,400 / $1,488,000
.....................= 30%
Investment turnover = Sales / Investment
.................................= $1,488,000 / $2,480,000
.................................= 0.6
Rate of return on investment = (net profit margin) x (asset turnover)
..............................................= 30% x 0.6
..............................................= 18%
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