Chapter 10, Problem 9PEA

a)

To determine

Determine the fixed asset Turnover Ratio of Company D for 2015 and 2016.

Explanation of Solution

Fixed Asset turnover: It is a ratio that measures the productive capacity of the fixed assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets. The following is the formula to calculate the ratio:

$\text{Fixed}\text{Asset turnover }=\frac{\text{Sales}}{\text{Average total}\text{fixed assets}}$

Calculate the fixed asset turnover ratio:

For 2015

Sales= $4,880,000

Total average fixed assets= $1,525,000 (1)

$\begin{array}{c}\text{Fixed}\text{Assets Turnover}=\frac{\text{Sales}}{\text{Average Fixed}\text{Assets}}\\ =\frac{\$4,880,000}{\$1,525,000}\\ =3.2\text{times}\end{array}$

Working note (1):

Calculate the average total fixed assets.

Beginning total fixed assets     = $1,450,000

Ending total fixed assets      = $1,600,000

$\begin{array}{c}\text{Average total assets}=\frac{\text{Total Beginning Fixed}\text{Assets}+\text{Total Ending}\text{Fixed Assets}}{2}\\ =\frac{\$1,450,000+\$1,600,000}{2}\\ =\$1,525,000\end{array}$

For 2016

Sales= $5,510,000

Total average fixed assets= $1,900,000 (2)

$\begin{array}{c}\text{Fixed}\text{Assets Turnover}=\frac{\text{Sales}}{\text{Average Fixed}\text{Assets}}\\ =\frac{\$5,510,000}{\$1,900,000}\\ =2.9\text{times}\end{array}$

Working note (2):

Calculate the average total fixed assets.

Beginning total fixed assets     = $1,600,000

Ending total fixed assets      = $2,200,000

$\begin{array}{c}\text{Average total assets}=\frac{\text{Total Beginning Fixed}\text{Assets}+\text{Total Ending}\text{Fixed Assets}}{2}\\ =\frac{\$1,600,000+\$2,200,000}{2}\\ =\$1,900,000\end{array}$

Hence, the fixed asset turnover ratio for 2015is 3.2 times and for 2016 is 2.9 times.

b)

To determine

Explain whether the change in the fixed asset turnover ratio from 2015 to 2016 indicates a favorable or unfavorable change.

Explanation of Solution

The change in the fixed asset turnover ratio from 2015to 2016 indicates an unfavorable change as the ratio decreased from 3.2 to 2.9 times. This is because, the company has inefficienctly utilized the fixed assets that resulted in a lower revenue generation