   Chapter 24, Problem 24.13EX

Chapter
Section
Textbook Problem

Profit margin, investment turnover, and return on investment The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department charges): Sales $82,500,000 Cost of goods sold 53,625,000 Gross profit$28,875,000 Administrative expenses 15,675,000 Income from operations $13,200,000 The manager of the Consumer Products Division is considering ways to increase the return on investment. a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that$55,000,000 of assets have been invested in the Consumer Products Division. b. If expenses could be reduced by $1,650,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division? (a) To determine Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated. Formula of profit margin: Profit margin=Income from operationsSales Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested. Formula of investment turnover: Investment turnover=SalesInvested assets 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. Formula of ROI according to Dupont formula: Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=Income from operationsInvested assets To determine: Profit margin, investment turnover, and return on investment of CP Division Explanation Determine ROI of CP Division, if income from operations is$13,200,000, and sales are $82,500,000, and assets invested are$55,000,000.

Return on investment =          Profit margin         ×    Investment turnover=Income from operationsSales×SalesInvested assets=$13,200,000$82,500,000×

(b)

To determine
Revised profit margin, investment turnover, and revised return on investment of CP Division, if the expenses are reduced by \$1,650,000, and write the impact of reduced expenses on ROI

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Why is understanding motivation important?

Foundations of Business (MindTap Course List)

What is a three-way match?

Accounting Information Systems

PROJECT RISK ANALYSIS The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Eac...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

The accounting equation (Assets = Liabilities + Owners Equity) must always be in balance.

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry) 