Question

Zachary Corporation’s balance sheet indicates that the company has $690,000 invested in operating assets. During the year, Zachary earned operating income of $95,220 on $1,380,000 of sales.

Required

1. Compute Zachary’s profit margin for the year.

2. Compute Zachary’s turnover for the year.

3. Compute Zachary’s return on investment for the year.

4. 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

• All working forms part of the answer
• [a]

A	Operating Income	$95,220
B	Sales	$1,380,000
C= (A/B) x 100	Profit Margin	6.90%

• [b]

A	Sales	$1,380,000
B	Invested Operating assets	$690,000
C = A/B	Turnover	2.00

• [c]

A	Operating Income	$95,220
B	Invested Operating assets	$690,000
C= (A/B) x 100	Return on Investments	13.80%

• Requirement [d]

		Requirement [d] [1]	Requirement [d] [2]	Requirement [d] [3]
A	Operating Income	$107,640	$97,980	$95,220
B	Invested Operating assets	$690,000	$690,000	$552,000
C = (A/B) x 100	ROI = ANSWERS	15.60%	14.20%	17.25%