Question

Last year the division had total sales of 23,380,000 , operating income of 2,828,980, and invested assets of 10,000,000. Required : a. What is the division's profit margin ? b. What is the division's investment turnover? c. What is the division's return on investment (ROI) using DuPont formula? d. What is the residual income if investors require a minimum return of 20% ?

Answer 1

The solution is given below

Explanation:

The computation is shown below:

a. The profit margin is

= Operating income ÷ total sales

= $2,828,980 ÷ $23,380,000

= 12.1%

b. The investment turnover is

= Total sales ÷ total assets

= $23,380,000 ÷ $10,000,000

= 2.34

c. The return on investment is

= Profit margin × investment turnover

= 12.1% × 2.34

= 28.29%

d. The residual income is

= Operating income - (minimum rate of return × assets)

= $2,828,980 - (20% of $10,000,000)

= $828,980