Question

Problem 1 Softmicro Corporation is considering a significant expansion to its product line. The sales force is excited about the opportunities that the new products will bring. The new products are a significant step up in quality above the company's current offerings but offer a complementary fit to its existing product line. Melinda Bates, senior production department manager, is very excited about the high-tech new equipment that will have to be acquired to produce the new products. Will Ratts, the company's CFO, has provided the following projections based on results with and without the new products. Without New Products Sales revenue $10,000,000 Net income $ 500,000 Average total assets $ 5,000,000 With New Products $ 16,000,000 $ 960,000 $ 12,000,000 Instructions a) Compute the company's return on assets, profit margin, and asset turnover, both with and without the new product line. b) Discuss the implications that your findings in part (a) have for the company's decision.

Answer 1

Answer:

Requirement a

Without New Products

Return on Assets = Net Income / Average Total Assets = 500000 / 5000000 = 10%

Profit Margin = Net Income / Sales Revenue = 500000 / 10000000 = 5%

Asset Turnover = Sales Revenue / Average Total Assets = 10000000/5000000 = 2.

With New Products

Return on Assets = Net Income / Average Total Assets = 960000 / 12000000 = 8%

Profit Margin = Net Income / Sales Revenue = 960000 / 16000000 = 6%

Asset Turnover = Sales Revenue / Average Total Assets = 16000000/ 12000000 = 1.33

Requirement b

Without New Products the Return on assets and asset turnover ratio is higher showing efficient utilisation of assets to generate profits.

Whereas with new products though profit on sales has increased ...Utilisation of Assets has fallen