Question

Zachary Corporation’s balance sheet indicates that the company has $690,000 invested in operating assets. During 2018, Zachary earned operating income of $95,220 on $1,380,000 of sales. Required Compute Zachary’s profit margin for 2018. Compute Zachary’s turnover for 2018. Compute Zachary’s return on investment for 2018. Recompute Zachary’s ROI under each of the following independent assumptions: (1) Sales increase from $1,380,000 to $1,656,000, thereby resulting in an increase in operating income from $95,220 to $107,640. (2) Sales remain constant, but Zachary reduces expenses, resulting in an increase in operating income from $95,220 to $97,980. (3) Zachary is able to reduce its invested capital from $690,000 to $552,000 without affecting operating income

Answer 1

The computation and with their solutions is given below:-

Step-by-step explanation:

The computation of given question is shown below:-

Profit Margin = Net Operating Income ÷ Sales × 100

= $95,220 ÷ $1,380,000 × 100

= 6.9%

Turnover Ratio = Sales ÷ Operating Assets

= $1,380,000 ÷ $690,000

= 2 times

Return on Investment = Net Operating Income ÷ Operating Assets

= $95,220 ÷ $690,000

= 13.8%

According to situation 1

Profit Margin = Net Operating Income ÷ Sales × 100

= $107,640 ÷ $1,656,000 × 100

= 6.5%

Turnover Ratio = Sales ÷ Operating Assets

= $1,656,000 ÷ $690,000

= 2.4 times

Return on Investment = Net Operating Income ÷ Operating Assets

= $107,640 ÷ $690,000

= 15.6%

According to situation 2

Profit Margin = Net Operating Income ÷ Sales × 100

= $97,980 ÷ $1,656,000 × 100

= 5.91%

Turnover Ratio = Sales ÷ Operating Assets

= $1,656,000 ÷ $690,000

= 2.4 times

Return on Investment = Net Operating Income ÷ Operating Assets

= $97,980 ÷ $690,000

= 14.2%

According to situation 3

Profit Margin = Net Operating Income ÷ Sales × 100

= $95,220 ÷ $1,656,000 × 100

= 5.75%

Turnover Ratio = Sales ÷ Operating Assets

= $1,656,000 ÷ $690,000

= 2.4 times

Return on Investment = Net Operating Income ÷ Operating Assets

= $95,220 ÷ $690,000

= 13.8%