The following data pertain to Nedra Company for 20x1: Sales revenue Cost of good

Question

The following data pertain to Nedra Company for 20x1: Sales revenue Cost of goods sold Operating expenses Average invested capital $1,000,000 550,000 400,000 500.000 Required: A. Calculate the company's sales margin, capital turnover, and return on investment for 20x1. B. If the sales and average invested capital remain the same, to what level would total costs and expenses have to be reduced in 20x2 to achieve a 15% return on investment? C. Assume that costs and expenses are reduced, as calculated in requirement "B." Calculate the firm's new sales margin. D. Suggest two possible actions that will improve the company's capital turnover.

Explanation / Answer

A) Sales margin = Net operating income / Sales Net operating income = 1000000-550000-400000 = $50000 Sales = $1000000 Sales margin = $50000/$1000000 = 5% Capital turnover = Sales/ Average invested capital Sales = $1000000 Average invested capital = $500000 Capital turnover = $1000000/$500000 = 2 Return on investment = Net operating income / Average invested capital Net operating income = 1000000-550000-400000 = $50000 Average invested capital = $500000 Return on investment = $50000/$500000 = 10% B) If the sales and average invested capital are same (ie, $1000000) then the total costs and expenses should be 85% of total sales to achieve 15% return on investment 85% of $1000000 = $850000 Present total costs and expenses = $550000+$400000 = $950000 The total costs and expenses should be reduced by $100000 (950000-850000) to achieve 15% return on investment C) New Sales margin = Net operating income / Sales Net operating income = 1000000-850000 = $150000 Sales = $1000000 Sales margin = $150000/$1000000 = 15% D) i) Increase the sales ii) procure fund from outsiders instead of procure it from common stockholders

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