Chapter 9, Problem 20PSA

a.

To determine

Calculate the profit margin of Corporation S.

Explanation of Solution

Operating profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of operating profit margin:

$\text{Operating profit margin}=\frac{\text{Operating income}}{\text{Sales}}$

Calculate the profit margin of Corporation S, if operating income is $50,000 and sales is $1,000,000.

$\begin{array}{c}\text{Operating profit margin =}\frac{\text{Operating income}}{\text{Sales}}\\ \text{= }\frac{\text{\$50,000}}{\text{\$1,000,000}}\\ \text{= 0}\text{.05 or 5\%}\end{array}$

Conclusion

Thus, the profit margin of Corporation S is 5%.

b.

To determine

Calculate the turnover of Corporation S.

Explanation of Solution

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

$\text{Investment turnover}=\frac{\text{Sales}}{\text{Operating assets}}$

Calculate the turnover of Corporation S, if operating assets is $500,000 and sales is $1,000,000.

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

Conclusion

Thus, the turnover of Corporation S is 2 times.

c.

To determine

Calculate the return on investment (ROI) of Corporation S.

Explanation of Solution

Calculate the ROI of Corporation S, if operating income is $50,000, and operating assets are $1,000,000.

$\begin{array}{c}\text{Return on investment = }\frac{\text{Operating income}}{\text{Operating assets}}\\ \text{=}\frac{\text{\$50,000}}{\text{\$5,000,000}}\\ \text{= 0}\text{.1 or 10\%}\end{array}$

Conclusion

Thus, the ROI of Corporation S is 10%.

d-1.

To determine

Calculate the ROI of Corporation S, if operating income increases to $56,000, and sales increases to $1,200,000.

Explanation of Solution

Formula of ROI according to DuPont formula:

$\begin{array}{c}\text{Return on investment = Profit margin × Investment turnover}\\ \text{=}\frac{\text{Operating income}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Operating assets}}\\ \text{=}\frac{\text{Operating income}}{\text{Operating assets}}\end{array}$

Calculate the ROI of Corporation S, if operating income increases to $56,000, sales increases to $1,200,000, and operating assets remain at $500,000.

$\begin{array}{c}\text{Return on investment =Profit margin × Investment turnover}\\ \text{=}\frac{\text{Operating income}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Operating assets}}\\ =\frac{\$56,000}{\$1,200,000}\times \frac{\$1,200,000}{\$500,000}\\ \text{= }4.67\%\times 2.4\\ \text{= 0}\text{.11208 or 11}\text{.21\%}\end{array}$

Conclusion

Thus, ROI of Corporation S is 11.21%.

2.

To determine

Calculate the ROI of Corporation S, if operating income increases to $52,000.

Explanation of Solution

Calculate the ROI of Corporation S, if operating income increases to $52,000, sales remain at $1,000,000, and operating assets remain at $500,000.

$\begin{array}{c}\text{Return on investment =Profit margin × Investment turnover}\\ \text{=}\frac{\text{Operating income}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Operating assets}}\\ =\frac{\$52,000}{\$1,000,000}\times \frac{\$1,000,000}{\$500,000}\\ \text{= }5.2\%\times 2\\ \text{= 0}\text{.104 or 10}\text{.4\%}\end{array}$

Conclusion

Thus, ROI of Corporation S is 10.4%.

3.

To determine

Calculate the ROI of Corporation S, if operating assets decreases to $400,000.

Explanation of Solution

Calculate the ROI of Corporation S, if operating assets decreases to $400,000, sales remain at $1,000,000, and operating income remains at $50,000.

$\begin{array}{c}\text{Return on investment =Profit margin × Investment turnover}\\ \text{=}\frac{\text{Operating income}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Operating assets}}\\ =\frac{\$50,000}{\$1,000,000}\times \frac{\$1,000,000}{\$400,000}\\ \text{= }5\%\times 2.5\\ \text{= 0}\text{.125 or 12}\text{.5\%}\end{array}$

Conclusion

Thus, ROI of Corporation S is 12.5%.