Question

Leggett and Platt is a world leader in the manufacturing of a broad line of components for the home, office and institutional furnishings and has a plant located in Simpsonville, KY. The following financial information of this plant is modified (for obvious reasons) in order to illustrate some of TOC concepts related to financial and operational measures.

Partial information from Income Statement:

Sales Revenue $50,000,000

Cost of Goods Sold (COGS) $35,000,000

   (Direct Material = 40%, Labor and overheads = 60%)

Selling & Marketing Expenses $ 500,000

General Administrative Expenses $ 2,000,000

Partial information from Balance Sheet:

Inventory (Direct Material, Work-in-progress and Finished Goods) $10,000,000

Other Assets (Machinery, Computers, Buildings etc.) $25,000,000

Notes: Assume that (i) Direct Material portion of Cost of Goods Sold is about 40%, and (ii) Direct material portion of Inventory as appeared in Balance Sheet is about 50%.

Based on the above limited financial information gathered from Balance Sheet and Income Statement:

1. Calculate following financial and operational measures as we have discussed in the class:

(i) Throughput

2. Prepare Throughput Accounting Income Statement

Answer 1

Financial measures

1.Gross profit margin=Gross profit/ net sales ×100

=15000000/50000000×100

=30%

2.

Net profit margin= net profit/ Net sales ×100

=12500000/50000000×100

=25%

3.Return On Asset ROA= Net income /Average Total Asset

=12500000/(5000000+25000000)×100

=41.7%

Operating measures

1. Operating Ratio=operating expenses/ net sales ×100

=25,00,000/50,000000×100

=5%

2.Throughput Accounting Income Statement

Particulars	Amount $
Sales Revenue	50,000,000
Less cost of goods sold	(35,000,000)
Throughput margin	15,000,000
Less selling and marketing expenses	500,000
Less administration expenses	2,000,000
Net profit	12,500,000
Total expense reported	25,00,000