Question

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 $1,518,000 Cost of goods sold 683,100 Gross profit $834,900 Administrative expenses 303,600 Income from operations $531,300 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 $2,530,000 of assets have been invested in the Consumer Products Division. Round the investment turnover to one decimal place. Profit margin % Investment turnover Rate of return on investment % b. If expenses could be reduced by $75,900 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 Investment turnover Rate of return on investment %

Answer 1

a.	Profit margin = Income from operations/Sales = $531300/$1518000 = 35%
	Investment turnover = Sales/Total assets = $1518000/$2530000 = 0.6
	Rate of return on investment = Profit margin x Investment turnover = 35% x 0.6 = 21%
b.	Income from operations = $531300 + $75900 = $607200
	Profit margin = Income from operations/Sales = $607200/$1518000 = 40%
	Investment turnover = Sales/Total assets = $1518000/$2530000 = 0.6
	Rate of return on investment = Profit margin x Investment turnover = 40% x 0.6 = 24%