Question

The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department charges):

Sales	$1,140,000
Cost of goods sold	513,000
Gross profit	$627,000
Administrative expenses	399,000
Income from operations	$228,000

The manager of the Consumer Products Division is considering ways to increase the return on investment.

a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that $1,900,000 of assets have been invested in the Consumer Products Division. Round the investment turnover to one decimal place.

Profit margin	%
Investment turnover
Rate of return on investment	%

b. If expenses could be reduced by $57,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division? Round the investment turnover to one decimal place.

Profit margin	%
Investment turnover
Rate of return on investment	%

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Answer 1

a) Answer

Profit margin	20%
Investment turnover	0.6
Return on investment	12%

Explanation

Profit margin = income from operations /sales *100

=$228,000/1140,000*100=20%

Investment turnover = sales/ investment =$1140,000/1,900,000= 0.6

Return on investment = Margin * turnover = 20%*0.6=12%

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b)answer

Profit margin	25%
Investment turnover	0.6
Return on investment	15%

Explanation

Income from operations = $228,000+57,000=$285,000

Profit margin = income from operations / sales*100

=$285,000/1,140,000*100= 25%

Investment turnover = 1,140,000/1900,000=0.6

Return on investment = Margin *turnover = 25%*0.6=15%