Profit Margin, Investment Turnover, and return on investment The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department charges): Sales $960,000 Cost of goods sold 432,000 Gross profit $528,000 Administrative expenses 336,000 Income from operations $192,000 The manager of the Consumer Products Division is considering ways to increase the return on investment. a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that $2,400,000 of assets have been invested in the Consumer Products Division. Round the investment turnover to one decimal place. Profit margin fill in the blank 1 % Investment turnover fill in the blank 2 Rate of return on investment fill in the blank 3 % b. If expenses could be reduced by $48,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division? Round the investment turnover to one decimal place. Profit margin fill in the blank 4 % Investment turnover fill in the blank 5 Rate of return on investment fill in the blank 6 %
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Profit Margin, Investment Turnover, and
The condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department charges):
| Sales | $960,000 |
| Cost of goods sold | 432,000 |
| Gross profit | $528,000 |
| Administrative expenses | 336,000 |
| Income from operations | $192,000 |
The manager of the Consumer Products Division is considering ways to increase the return on investment.
a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that $2,400,000 of assets have been invested in the Consumer Products Division. Round the investment turnover to one decimal place.
| Profit margin | fill in the blank 1 % |
| Investment turnover | fill in the blank 2 |
| fill in the blank 3 % |
b. If expenses could be reduced by $48,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division? Round the investment turnover to one decimal place.
| Profit margin | fill in the blank 4 % |
| Investment turnover | fill in the blank 5 |
| Rate of return on investment | fill in the blank 6 % |
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