Profit margin, investment turnover, and return on investment the condensed income
the condensed income statement for the consumer products division of milner 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 rate of return on investment.
a. using the dupont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment of the consumer products division, assuming that $5,000,000 of assets have been invested in the consumer products division. if required, round the investment turnover to one decimal place.
b. if expenses could be reduced by $350,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and rate of return on investment for the consumer products division? if required, round the investment turnover to one decimal places.
A) To calculate the company's return on investment we have to calculate the profit margin and the total asset turnover first:
Profit margin = net income / total sales
Profit margin = $13,200,000 / $82,500,000 = 0.16 x 100 = 16%
Total asset turnover = total sales / total assets
Total asset turnover = $82,500,000 / $5,000,000 = 16.5 x 100 = 1,650%
The DuPont formula for calculating return on investment is:
ROI = profit margin x total asset turnover
ROI = 0.16 x 16.5 = 2,64 x 100 = 264%
B) If expenses decrease by $350,000 then:
Profit margin = $13,550,000 / $82,500,000 = 0.1642 x 100 = 16.42%
Total asset turnover = $82,500,000 / $5,000,000 = 16.5 x 100 = 1,650%
ROI = 0.1642 x 16.5 = 2,71 x 100 = 271%
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