Chapter 24, Problem 15E

Requirement-1:

To determine

The Return on Investment for the past year

Answer to Problem 15E

The Return on Investment for the past year is 8%

Explanation of Solution

The Return on Investment for the past year is calculated as follows:

ZNet Co.
Past year
Operating Income (A)	$1,000,000
Average Invested Assets (B)	$ 12,500,000
Return on Investment (C) = A/B =	8.00%

Concept Introduction:

Return on total Assets:

The Return on total assets is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

  $Returnonassets=\frac{Netincome}{AverageTotalAssets}$

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  $AveragetotalAssets=\frac{\left(Beginningtotalassets+Endingtotalassets\right)}{2}$

Profit Margin Ratio:

Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows:

  $ProfitMargin =\frac{OperatingIncome}{Sales}$

Investment Turnover Ratio:

Investment Turnover Ratio compares the sales with respect to the Average assets invested in the business. The formula to calculate the Investment Turnover Ratio is = Sales / Average Assets invested

Requirement-2:

To determine

The Profit Margin for the past year

Answer to Problem 15E

The Profit Margin for the past year is 20%

Explanation of Solution

The Profit Margin for the past year is calculated as follows:

ZNet Co.
Past year
Operating Income (A)	$1,000,000
Sales (B)	$5,000,000
Profit Margin (C) = A/B =	20.00%

Concept Introduction:

Return on total Assets:

The Return on total assets is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

  $Returnonassets=\frac{Netincome}{AverageTotalAssets}$

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  $AveragetotalAssets=\frac{\left(Beginningtotalassets+Endingtotalassets\right)}{2}$

Profit Margin Ratio:

Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows:

  $ProfitMargin =\frac{OperatingIncome}{Sales}$

Investment Turnover Ratio:

Investment Turnover Ratio compares the sales with respect to the Average assets invested in the business. The formula to calculate the Investment Turnover Ratio is = Sales / Average Assets invested

Requirement-3:

To determine

The Return on investment for the next year

Answer to Problem 15E

The Return on investment for the next year shall be 9.60%

Explanation of Solution

The Return on investment for the next year is calculated as follows:

ZNet Co.
Next year
Sales (A) (5,000,000*120%)	$6,000,000
Profit Margin (B)	20%
Operating Income (C) =A*B =	$1,200,000
Average Invested Assets (D)	$ 12,500,000
Return on Investment (E) = C/D =	9.60%

Concept Introduction:

Return on total Assets:

The Return on total assets is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

  $Returnonassets=\frac{Netincome}{AverageTotalAssets}$

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  $AveragetotalAssets=\frac{\left(Beginningtotalassets+Endingtotalassets\right)}{2}$

Profit Margin Ratio:

Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows:

  $ProfitMargin =\frac{OperatingIncome}{Sales}$

Investment Turnover Ratio:

Investment Turnover Ratio compares the sales with respect to the Average assets invested in the business. The formula to calculate the Investment Turnover Ratio is = Sales / Average Assets invested

Requirement-4:

To determine

The Investment Turnover for the next year

Answer to Problem 15E

The Investment Turnover for the next year shall be 0.48

Explanation of Solution

The Investment Turnover for the next year is calculated as follows:

ZNet Co.
Next year
Sales (A) (5,000,000*120%)	$6,000,000
Average Invested Assets (B)	$ 12,500,000
Investment Turnover (C) = A/B =	0.48