Question

4. Given the following information, a. calculate the ratios of which industry norms are provided and b. comment as whether it is favourable or unfavourable compared to industry norms. (15p) Accounts Receivable Inventories Sales Credit Sales Cost of Goods Sold Operating Profits Net Fixed Assets Total Assets 9.000 1.400 54.000 36.000 28.000 12.000 27.000 88.000 your calculation comment The Indsutry norms are as follows: Operating Return on Assets 9,0% Operating Profit Margin 20,0% Total Asset Turnover 0,5x Accounts Receivable Turnover 6,0x Inventory Turnover 18,0x Fixed Asset Turnover 1,2x

Answer 1

Answer:

Operating Return on Assets:
Operating Return on Assets = Operating Profits / Total Assets *100
Operating Return on Assets = 12.000 / 88.000 * 100
Operating Return on Assets = 13,6%

Comment: Favourable, as Operating Return on Assets is more than Industry norm.

Operating Profit Margin:
Operating Profit Margin = Operating Profit / Sales* 100
Operating Profit Margin = 12.000 / 54.000 * 100
Operating Profit Margin = 22,2%

Comment: Favourable, as Operating Profit Margin is more than Industry norm.

Total Assets Turnover:
Total Assets Turnover = Sales / Total Assets
Total Assets Turnover = 54.000 / 88.000
Total Assets Turnover = 0,6x

Comment: Favourable, as Total Assets Turnover is more than Industry norm.

Accounts Receivable Turnover:
Accounts Receivable Turnover = Credit Sales / Accounts Receivable
Accounts Receivable Turnover = 36.000 / 9.000
Accounts Receivable Turnover = 4,0x

Comment: Unfavourable, as Accounts Receivable Turnover is less than Industry norm.

Inventory Turnover:
Inventory Turnover = Cost of Goods Sold / Inventories
Inventory Turnover = 28.000 / 1.400
Inventory Turnover = 20,0x

Comment: Favourable, as Inventory Turnover is more than Industry norm.

Fixed Assets Turnover:
Fixed Assets Turnover = Sales / Net Fixed Assets
Fixed Assets Turnover = 54.000 / 27.000
Fixed Assets Turnover = 2,0x

Comment: Favourable, as Fixed Assets Turnover is more than Industry norm.