Chapter 15, Problem 22P

a)

To determine

Calculate profit margin of Corporation H for 2014.

Explanation of Solution

Operating profit margin: It is one of the profitability ratios. Operating profit margin ratio is used to measure the percentage of operating income that is being generated per dollar of revenue or sales.

$\text{Operating profit margin}=\frac{\text{Operating income}}{\text{Net sales}}$

Calculate profit margin of Corporation H for 2014.

$\begin{array}{c}\text{Profit margin}=\frac{\text{Operating income}}{\text{Sales}}\times 100\\ =\frac{\$50,000}{\$1,000,000}\times 100\\ =5\%\end{array}$

Thus, the profit margin of Corporation H for 2014 is 5%.

b)

To determine

Calculate turnover of Corporation H for 2014.

Explanation of Solution

Turnover: Turnover is a ratio that measures the amount of sales generated from each dollar of operating assets. Thus, it shows the relationship between the net sales and the operating assets. The formula to calculate turnover is as follows:

$\text{Turnover }=\frac{\text{Sales}}{\text{Operating assets}}$

Calculate turnover of Corporation H for 2014.

$\begin{array}{c}\text{Turnover}=\frac{\text{Sales}}{\text{Operating assets}}\\ =\frac{\$1,000,000}{\$500,000}\\ =2\text{ times}\end{array}$

Thus, the turnover of Corporation H for 2014 is 2.0 times.

c)

To determine

Calculate return on investment of Corporation H for 2014.

Explanation of Solution

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Calculate return on investment of Corporation H for 2014:

$\begin{array}{c}\text{ROI}=\text{Operating profit margin}\times \text{Turnover}\\ =\frac{\$50,000}{\$1,000,000}\times \frac{\$1,000,000}{\$500,000}\\ =5\times 2\\ =10.00\%\end{array}$

Thus, the ROI of Corporation H for 2014 is 10.00%.

d) 1.

To determine

Calculate return on investment of Corporation H when the sales increased from $1,000,000 to $1,200,000, resulting in an increase in operating income from $50,000 to $56,000.

Explanation of Solution

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies. It is calculated by the given formula:

$\begin{array}{c}\begin{array}{l}\text{Return on }\\ \text{Investment (ROI)}\end{array}\}=\text{Capital turnover}\times \text{Margin}\\ \frac{\text{Operating income}}{\text{Operating assets}}\text{=}\frac{\text{Net sales}}{\text{Operating assets}}\times \frac{\text{Operating income}}{\text{Net sales}}\end{array}$

Calculate return on investment of Corporation H:

$\begin{array}{c}\text{ROI}=\text{Operating profit margin}\times \text{Turnover}\\ =\frac{\$56,000}{\$1,200,000}\times \frac{\$1,200,000}{\$500,000}\\ =11.20\%\end{array}$

Thus, the ROI of Corporation H for 2014 is 11.20%.

d) 2.

To determine

Calculate return on investment of Corporation H when sales remain constant, but Corporation H reduces expenses, resulting in an increase in operating income from $50,000 to $52,000.

Explanation of Solution

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies. It is calculated by the given formula:

$\begin{array}{c}\begin{array}{l}\text{Return on }\\ \text{Investment (ROI)}\end{array}\}=\text{Capital turnover}\times \text{Margin}\\ \frac{\text{Operating income}}{\text{Operating assets}}\text{=}\frac{\text{Net sales}}{\text{Operating assets}}\times \frac{\text{Operating income}}{\text{Net sales}}\end{array}$

Calculate return on investment of Corporation H:

$\begin{array}{c}\text{ROI}=\text{Operating profit margin}\times \text{Turnover}\\ =\frac{\$52,000}{\$1,000,000}\times \frac{\$1,000,000}{\$500,000}\\ =10.40\%\end{array}$

Thus, the ROI of Corporation H for 2014 is 10.40%.

d) 3.

To determine

Calculate return on investment of Corporation H when Corporation H is able to reduce its invested capital from $500,000 to $400,000 without affecting operating income.

Explanation of Solution

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies. It is calculated by the given formula:

$\begin{array}{c}\begin{array}{l}\text{Return on }\\ \text{Investment (ROI)}\end{array}\}=\text{Capital turnover}\times \text{Margin}\\ \frac{\text{Operating income}}{\text{Operating assets}}\text{=}\frac{\text{Net sales}}{\text{Operating assets}}\times \frac{\text{Operating income}}{\text{Net sales}}\end{array}$

Calculate return on investment of Corporation H:

$\begin{array}{c}\text{ROI}=\text{Operating profit margin}\times \text{Turnover}\\ =\frac{\$50,000}{\$1,000,000}\times \frac{\$1,000,000}{\$400,000}\\ =12.50\%\end{array}$

Thus, the ROI of Corporation H for 2014 is 12.50%.