   Chapter 24, Problem 24.4APE

Chapter
Section
Textbook Problem

Profit margin, investment turnover, and ROI Cash Company has income from operations of $112,500, invested assets of$750,000, and sales of $1,875,000. Use the DuPont formula to compute the return on investment and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment. (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 of Company C Explanation Determine profit margin of Company C, if income from operations is$112,500, and sales are \$1,875,000.

Profit margin=Income from operationsSales

(b)

To determine
Investment turnover of Company C

(c)

To determine
Return on investment of Company C

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