Question

Profit Margin, Investment Turnover, and Rate of Return on Investment

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

Sales	$884,000
Cost of goods sold	397,800
Gross profit	$486,200
Administrative expenses	176,800
Income from operations	$309,400

The manager of the International Division is considering ways to increase the rate of return on investment.

a. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment of the International Division, assuming that $2,210,000 of assets have been invested in the International Division. Round all answers to one decimal place.

Profit margin	%
Investment turnover
Rate of return on investment	%

b. If expenses could be reduced by $44,200 without decreasing sales, what would be the impact on the profit margin, investment turnover, and rate of return on investment for the International Division? Round all answers to one decimal place.

Profit margin	%
Investment turnover
Rate of return on investment	%

Answer 1

Answer a.

Particulars	Formula	Working	Answer
Profit margin	(Income from operations / Sales) * 100	($309,400 / $884,000) * 100	35 %
Investment turnover	Sales / Total assets	$884,000 / $2,210,000	0.4
Rate of return on investment	Profit margin * Investment turnover	35 % * 0.4	14 %

Answer b

New income from operations due to reduction in cost = $309,400 + $44,200 = $353,600

Particulars	Formula	Working	Answer
Profit margin	(Income from operations / Sales) * 100	($353,600 / $884,000) * 100	40 %
Investment turnover	Sales / Total assets	$884,000 / $2,210,000	0.4
Rate of return on investment	Profit margin * Investment turnover	40 % * 0.4	16%