(Analyzing operating return on assets) The R. M. Smithers Corporation earned an
ID: 2639507 • Letter: #
Question
(Analyzing operating return on assets) The R. M. Smithers Corporation earned an operating profit margin of 10.2 percent based on sales of $11.1 million and total assets of $5.3 million last year. a. What was Smithers? total asset turnover ratio? b. During the coming year the company president has set a goal of attaining a total asset turnover of 3.1. How much must firm sales rise, other things being the same, for the goal to be achieved? (State your answer in both dollars and percentage increase in sales.) c. What was Smithers? operating return on assets last year? Assuming the firm?s operating profit margin remains the same, what will the operating return on assets be next year if the total asset turnover goal is achieved? a. What was Smithers? total asset turnover ratio? Smithers? total asset turnover ratio was x. (Round to one decimal place.)Explanation / Answer
Operating PM = 10.2%
Sales = $11.1 million
Total Assets = $5.3 million
a. Total Asset Turnover Ratio = Sales/ Total assets = 11.1/5.3 = 2.09
b. Asset Turnover required = 3.1
Sales = Total Asset Turnover Ratio * Total assets = (3.1 * 5.3)million = 16.43million
Increase in sales = (16.43 - 11.1)million = 5.33 million
Percentage increase in sales = (increase in sales/last year's sales)*100 = (5.33/11.1)*100 = 48.02%
c. Operating ROA = EBIT/Total Assets
EBIT = Operating Profit Margin * Sales = 10.2% * 11.1 = 1.1322million
Operating ROA = 1.1322/5.3 = 0.2136 = 21.36%
For the new sales of 16.43million-
Operating ROA = (10.2% * 16.43)/5.3 = 1.67586/5.3 = 0.3162 = 31.62%
Hope this helps, regards
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