Question

Sorrento Corporation’s balance sheet indicates that the company has $700,000 invested in operating assets. During 2018, Sorrento earned operating income of $98,000 on $1,400,000 of sales.

Required

Compute Sorrento’s profit margin for 2018.

Compute Sorrento’s turnover for 2018.

Compute Sorrento’s return on investment for 2018.

Recompute Sorrento’s ROI under each of the following independent assumptions:
(1) Sales increase from $1,400,000 to $1,680,000, thereby resulting in an increase in operating income from $98,000 to $110,880.
(2) Sales remain constant, but Sorrento reduces expenses, resulting in an increase in operating income from $98,000 to $100,800.
(3) Sorrento is able to reduce its invested capital from $700,000 to $560,000 without affecting operating income.

Compute Sorrento’s profit margin, turnover and return on investment for 2018. (Round "Profit margin" and "Return on investment" to 1 decimal place.)

a.	Profit margin		%
b.	Turnover		times
c.	Return on investment		%

Recompute Sorrento’s ROI under each of the following independent assumptions: (Do not round intermediate calculations. Round your answers to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

(1) Sales increase from $1,400,000 to $1,680,000, thereby resulting in an increase in operating income from $98,000 to $110,880.

(2) Sales remain constant, but Sorrento reduces expenses, resulting in an increase in operating income from $98,000 to $100,800.

(3) Sorrento is able to reduce its invested capital from $700,000 to $560,000 without affecting operating income.

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Return on Investment
(1)		%
(2)		%
(3)		%

Answer 1

Part - 1

a. Compute Sorrento’s profit margin for 2018.

= Operating Income / Sales * 100 = 98000 / 1400,000 *100 = 7 %

b. Compute Sorrento’s turnover for 2018.

= Sales / Operating assets = 1400,000 / 700,000 = 2 times

c. Compute Sorrento’s return on investment for 2018.

= Operating Income / Operating assets * 100 = 98000 / 700,000 * 100 = 14%

or ....... Operating profit * turnover = 7 * 2 = 14%

(1) Sales increase from $1,400,000 to $1,680,000, thereby resulting in an increase in operating income from $98,000 to $110,880.

ROI = 110,880 / 700,000 * 100 = 15.84 %

(2) Sales remain constant, but Sorrento reduces expenses, resulting in an increase in operating income from $98,000 to $100,800.

= 100,800 / 700,000 * 100 = 14.4 %

(3) Sorrento is able to reduce its invested capital from $700,000 to $560,000 without affecting operating income.

= 98000 / 560,000 * 100 = 17.5%