Question

Calculating Average Operating Assets, Margin, Turnover, and Return on InvestmentEast Mullett Manufacturing earned operating income last year as shown in the following income statement:Sales $531,250Cost of goods sold 280,000Gross margin $251,250Selling and administrative expense 194,000Operating income $57,250Less: Income taxes (@ 40%) 22,900 Net income $34,350At the beginning of the year, the value of operating assets was $390,000. At the end of the year, the value of operating assets was $460,000.Required:For East Mullett Manufacturing, calculate the following:1. Average operating assets $ 2. Margin (round to two decimal places) %3. Turnover (round to two decimal places) 4. Return on investment (round to one decimal place) %

Answer 1

Answer:

1. $425,000

2. 10.78%

3. 1.25

4. 13.5%

Explanation:

The computations are shown below:

1. For Average Operating Assets

Average operating assets = (Beginning Operating Assets + Ending Operating Assets) ÷ 2

= ($390,000 + $460,000) ÷ 2

= $425,000

2. For margin

Margin = Operating Income ÷ Sales × 100

            = $57,250 ÷ $531,250 × 100

            = 10.78%

3. For turnover:

Turnover = Sales ÷ Average Operating Assets

               = $531,250 ÷ $425,000

               = 1.25

4. For Return on investment:

Return on investment  = Operating Income ÷ Average Operating Assets

                                       = $57,250 ÷ $425,000

                                       = 13.5%