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Fanning Corporation’s balance sheet indicates that the company has $550,000 invested in operating assets. During 2018, Fanning earned operating income of $60,500 on $1,100,000 of sales. Required Compute Fanning’s profit margin for 2018. Compute Fanning’s turnover for 2018. Compute Fanning’s return on investment for 2018. Recompute Fanning’s ROI under each of the following independent assumptions: (1) Sales increase from $1,100,000 to $1,320,000, thereby resulting in an increase in operating income from $60,500 to $67,320. (2) Sales remain constant, but Fanning reduces expenses, resulting in an increase in operating income from $60,500 to $62,700. (3) Fanning is able to reduce its invested capital from $550,000 to $440,000 without affecting operating income.

User Anuj Rana
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We'll use the following formulas:

Profit margin = Operating income / Sales

Turnover = Sales / Operating assets

Return on investment (ROI) = Operating income / Operating assets

Using the data provided in the question, we can calculate the financial ratios and ROI for Fanning Corporation:

Profit margin = $60,500 / $1,100,000 = 0.055 or 5.5%

Turnover = $1,100,000 / $550,000 = 2 times

ROI = $60,500 / $550,000 = 0.11 or 11%

Now, let's compute Fanning's ROI under each of the following independent assumptions:

(1) Sales increase from $1,100,000 to $1,320,000, thereby resulting in an increase in operating income from $60,500 to $67,320.

Profit margin = $67,320 / $1,320,000 = 0.051 or 5.1%

Turnover = $1,320,000 / $550,000 = 2.4 times

ROI = $67,320 / $550,000 = 0.1224 or 12.24%

(2) Sales remain constant, but Fanning reduces expenses, resulting in an increase in operating income from $60,500 to $62,700.

Profit margin = $62,700 / $1,100,000 = 0.057 or 5.7%

Turnover = $1,100,000 / $550,000 = 2 times

ROI = $62,700 / $550,000 = 0.114 or 11.4%

(3) Fanning is able to reduce its invested capital from $550,000 to $440,000 without affecting operating income.

Profit margin = $60,500 / $1,100,000 = 0.055 or 5.5%

Turnover = $1,100,000 / $440,000 = 2.5 times

ROI = $60,500 / $440,000 = 0.138 or 13.8%

Therefore, Fanning Corporation's ROI increases under scenarios (1) and (3), while it remains the same in scenario (2).

User Justin Bennett
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