Answer:
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%
