Question

Financial statement data for two years for Townson Company are as follows: Year 2 Year 1 Sales $3,645,000 $4,250,000 Fixed assets: Beginning of year 880,000 820,000 End of year 520,000 880,000 All of the following statements are true regarding the company's fixed asset turnover ratio except a.Townson has become more efficient in generating sales with its fixed assets in Year 2 as compared to Year 1. b.since Year 1, it appears that Townson may have become more labor-intensive, requiring smaller amounts of fixed asset investments. c.Townson's fixed asset turnover ratio has decreased between Year 1 and Year 2. d.Townson's fixed asset turnover ratio has increased between Year 1 and Year 2.

Answer 1

Answer:

C) Townson's fixed asset turnover ratio has decreased between Year 1 and Year 2.

Explanation:

                      Year 2                               Year 1

Sales           $3,645,000                    $4,250,000

Fixed assets:

Beginning of year 880,000 820,000

End of year 520,000 880,000

fixed asset turnover (FAT) ratio = net sales / average fixed assets

FAT ratio year 1 = $4,250,000 / [($820,000 + $880,000) / 2] = 5

FAT ratio year 2 = $3,645,000 / [($880,000 + $520,000) / 2] = 5.2

Townson's fixed asset turnover ratio increased between year 1 and year 2.