Question

A large international company has two business units. Invested assets and condensed income statement data for each business unit for the past year are as follows: Compute the following for Business Unit 1: a) Operating Income Using the Dupont Formula: b) Profit Margin % (round % to 1 decimal) c) Investment Turnover (round to 2 decimals) d) Return on Investment (round 1 decimal) Compute the following for Business Unit 2: 2A) Operating Income Using the Dupont Formula: 2B) Profit Margin (round % to 1 decimal) 2C) Investment Turnover (round to 2 decimals) 2D) Return on Investment (round 1 decimal)

Answer 1

1. Compute the following for Business Unit 1:

a) Operating Income = $117,500

b) Profit Margin = 20.7%

c) Investment Turnover = 0.86

d) Return on Investment = 0.2

2. Compute the following for Business Unit 2:

a) Operating Income = $69,750

b) Profit Margin = 12.2%

c) Investment Turnover = 1.18

d) Return on Investment = 0.1

Step-by-step explanation:

1. Compute the following for Business Unit 1:

a) Operating Income

Operating Income = Revenue – Operating expenses = $280,000 – $162,500 = $117,500

Using the Dupont Formula:

b) Profit Margin % (round % to 1 decimal)

Net income = Operating income – Services department charges = $117,500 - $59,500 = $58,000

Profit Margin = Net income / Revenue = ($58,000 / $280,000) * 100 = 20.7%

c) Investment Turnover (round to 2 decimals)

Investment Turnover = Revenue / Invested Assets = $280,000 / $325,000 = 0.86

d) Return on Investment (round 1 decimal)

Return on Investment = Net income / Invested Assets = $58,000 / $325,000 = 0.1785 = 0.2

2. Compute the following for Business Unit 2:

a) Operating Income

Operating Income = Revenue – Operating expenses = $222,500 – $152,750 = $69,750

Using the Dupont Formula:

b) Profit Margin % (round % to 1 decimal)

Net income = Operating income – Services department charges = $69,750 - $42,625 = $27,125

Profit Margin = Net income / Revenue = ($27,125 / $222,500) * 100 = 12.2%

c) Investment Turnover (round to 2 decimals)

Investment Turnover = Revenue / Invested Assets = $222,500 / $189,000 = 1.18

d) Return on Investment (round 1 decimal)

Return on Investment = Net income / Invested Assets = $27,125 / $189,000 = 0.1435 = 0.1