Question

Perez Corporation’s balance sheet indicates that the company has $610,000 invested in operating assets. During 2018, Perez earned operating income of $74,420 on $1,220,000 of sales.

Required

1. Compute Perez’s profit margin for 2018.

2. Compute Perez’s turnover for 2018.

3. Compute Perez’s return on investment for 2018.

4. Recompute Perez’s ROI under each of the following independent assumptions:
   (1) Sales increase from $1,220,000 to $1,464,000, thereby resulting in an increase in operating income from $74,420 to $87,840.
   (2) Sales remain constant, but Perez reduces expenses, resulting in an increase in operating income from $74,420 to $76,860.
   (3) Perez is able to reduce its invested capital from $610,000 to $488,000 without affecting operating income.

Compute Perez’s profit margin, turnover and return on investment for 2018. (Round "Profit margin" and "Return on investment" to 1 decimal place.)

	a. Profit margin % b. Turnover times c. Return on investment %

Recompute Perez’s ROI under each of the following independent assumptions: (Do not round intermediate calculations. Round your answers to 2 decimal places. (i.e., .2345 should be entered as 23.45).)

1. (1) Sales increase from $1,220,000 to $1,464,000, thereby resulting in an increase in operating income from $74,420 to $87,840.

   (2) Sales remain constant, but Perez reduces expenses, resulting in an increase in operating income from $74,420 to $76,860.

   (3) Perez is able to reduce its invested capital from $610,000 to $488,000 without affecting operating income.

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	Return on Investment (1) % (2) % (3) %

Answer 1

a. Profit margin = Operating income /Sales *100

Profit margin = $74,420 / 1,220,000 *100 = 6.1%

b. Turnover = Sales / Operating assets

Turnover = $1,220,000 / 610,000 = 2 Times

c. Return on investments = Operating income / Operating assets

Return on investments = $74,420 / 610,000 *100 = 12.2%

d.

1. Return on investments = $87,840 / 610,000 *100 = 14.4%

2. Return on investments = $76,860 / 610,000 *100 = 12.6%

3. Return on investments = $74,420 / 488,000 *100 = 15.25%