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

SOLUTION :

a)

1.COMPANY'S RETURN ON ASSETS :

   A company's return on asset (ROA) is calculated as the ratio of its net income in a given period to the total value of its asset. For instance, If a company has dollar 10,000 in total assets and generates dollar 2000 in net income its Arrow would be dollar $2,000 10000 which is equal to 0.2 for 20%

---- Without New Products :

company' return on assets = Net income.   

Total value of assets

= 5,00,000/50,00,000

= 0.1 or 10%

---With New Products :

Company' return on assets =  9,60,000/12,00,000

= 0.8 or 80%

2.PROFIT MARGIN :

To find the margin, divide gross profit by the revenue. To make a percentage, multiply it by hundred.

----- Without New product

profit margin = gross profit.

Revenue

=. 5,00,000/10,000,000

= 0.05 or 5%

---- With New products

Profit margin = 960000/16000000

= 0.06. Or 6%

3.ASSET TURNOVER :

The asset turnover ratio is calculated by dividing net sales by average total assets.

----- Without New products

asset turnover ratio = net sales.

Average total assets

=. 10000000/5000000

= 2

----- With New Products :

Asset turnover ratio =.  160000000/12000000

=. 1.333

b) IMPLICATIONS OF FINDINGS :

1. COMPANY'S RETURN ON ASSETS :

Return on assets measures the amount of profit the company generates as a percentage of the value of its total assets.

​ The profit percentage of assets varies by industry, but in general, the higher the ROA the better. For this reason it is often more effective to compare a company's aao a to that of other companies in same industry or against its own ROA figures from previous periods. Falling ROA is almost always a problem but investors and analyst should bear in mind that the earth does not account for outstanding liabilities and may indicate a higher profit level than actually derived.

  Thus, companies generally prefer a higher ROA and since company with new products has a higher of 0.8 or 80% compared to with that of the without new products with a A ratio of 0.1or 10%

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2. PROFIT MARGIN :

Accounting specialist use profit margin as a barometer of the company's pricing strategies. If the calculation leads to a weak gross profit margin, the companies decision makers mein will have to adjust product or service pricing upward.

Gross profit margin is calculated by detecting the cost of product sold from the net sales.

Thus, since the profit margin is required to be high for the company to have good decision making and efficiency the with new products the company has a higher profit margin of 0.06 or 6%

​​​​​Asas compared to that of without new products which has a lower profit margin of 0.05 or 5 %.

3. ASSET TURNOVER RATIO :

The asset turnover ratio measures the value of a companies sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of deficiency with which company is using its assets to generate revenue.

The higher the asset turnover ratio, the more efficient accompany. Conversely, If a company has a lower asset turnover ratio, it indicates it is not efficiently using its assets to generate sales.

Thus, even the company requires the higher asset turnover ratio for efficiency in decision making of the company.

Butbut here without new products has a asset turnover ratio of two virus with new products has an asset turnover ratio of 1.33.

So so without you products is better for asset turnover ratio.

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