Question

Baker Oats had an asset turnover of 1.6 times per year. a. If the return on total assets (investment) was 12 percent, what was Baker’s profit margin? (Input your answer as a percent rounded to 1 decimal place.) b. The following year, on the same level of assets, Baker’s assets turnover declined to 2 times and its profit margin was 6 percent. How did the return on total assets change from that of the previous year?

Answer 1

Answer:

a) Baker's profit margin = 7.5%

b) No change on return on total assets

Explanation:

a) Assets Turnover = $\frac{Net Sales}{Average Total Assets}$ = 1.6 times

Return on total assets = $\frac{Net profit}{Average Total assets}$ = 12%

Then we have profit margin on sales = $\frac{Return on total assets}{Asset turnover ratio}$ = $\frac{12}{1.6}$ = 7.5%

b) In case asset turnover declined to 2 times with profit margin of 6% then Return on total assets = Asset turnover ratio X Profit Margin

= 2 X 6% = 12%

Thus there is no change in that case on return on total investments.

a) Baker's profit margin = 7.5%

b) Thus there is no change in that case on return on total investments.