Fundamental Managerial Accounting Concepts
Fundamental Managerial Accounting Concepts
7th Edition
ISBN: 9780078025655
Author: Thomas P Edmonds, Christopher Edmonds, Bor-Yi Tsay, Philip R Olds
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 9, Problem 20PSB

a.

To determine

Calculate the profit margin of Corporation S.

a.

Expert Solution
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Explanation of Solution

Operating profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of operating profit margin:

Operating profit margin=Operating incomeSales

Calculate the profit margin of Corporation S, if operating income is $16,000 and sales is $320,000.

Operating profit margin =Operating incomeSales$16,000$320,000= 0.05 or 5%

Conclusion

Thus, the profit margin of Corporation S is 5%.

b.

To determine

Calculate the turnover of Corporation S.

b.

Expert Solution
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Explanation of Solution

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

Investment turnover=SalesOperating assets

Calculate the turnover of Corporation S, if operating assets is $200,000 and sales is $320,000.

Turnover =SalesOperating assets$320,000$200,000= 1.6 times

Conclusion

Thus, the turnover of Corporation S is 1.6 times.

c.

To determine

Calculate the return on investment (ROI) of Corporation S.

c.

Expert Solution
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Explanation of Solution

Calculate the ROI of Corporation S, if operating income is $16,000, and operating assets are $200,000.

Return on investment = Operating incomeOperating assets=$16,000$200,000= 0.08 or 8%

Conclusion

Thus, the ROI of Corporation S is 8%.

d-1.

To determine

Calculate the ROI of Corporation S, if operating income increases to $18,000, and sales increases to $360,000.

d-1.

Expert Solution
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Explanation of Solution

Formula of ROI according to DuPont formula:

Return on investment = Profit margin × Investment turnover=Operating incomeSales×SalesOperating assets=Operating incomeOperating assets

Calculate the ROI of Corporation S, if operating income increases to $18,000, sales increases to $360,000, and operating assets remain at $200,000.

Return on investment =Profit margin         ×    Investment turnover=Operating incomeSales×SalesOperating assets=$18,000$360,000×$360,000$200,0005% ×1.8= 0.09 or 9%

Conclusion

Thus, ROI of Corporation S is 9%.

2.

To determine

Calculate the ROI of Corporation S, if operating income increases to $16,800.

2.

Expert Solution
Check Mark

Explanation of Solution

Calculate the ROI of Corporation S, if operating income increases to $16,800, sales remain at $320,000, and operating assets remain at $200,000.

Return on investment =Profit margin         ×    Investment turnover=Operating incomeSales×SalesOperating assets=$16,800$320,000×$320,000$200,0005.25% ×1.6= 0.084 or 8.4%

Conclusion

Thus, ROI of Corporation S is 8.4%.

3.

To determine

Calculate the ROI of Corporation S, if operating assets decreases to $160,000.

3.

Expert Solution
Check Mark

Explanation of Solution

Calculate the ROI of Corporation S, if operating assets decreases to $160,000, sales remain at $320,000, and operating income remains at $16,000.

Return on investment =Profit margin         ×    Investment turnover=Operating incomeSales×SalesOperating assets=$16,000$320,000×$320,000$160,0005% ×2= 0.01 or 10%

Conclusion

Thus, ROI of Corporation S is 10%.

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Fundamental Managerial Accounting Concepts

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