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3 years ago

Profit Margin, Investment Turnover, and Return on Investment

Business

1 answer:

77julia77 [94]3 years ago

4 0

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%

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