Question

CHECK FIGURES C. 10.00% d. (3) 12.50% Problem 9-20A Return on investment Sorrento Corporation's balance sheet indicates that the company has $500,000 invested in operating assets. During Year 2, Sorrento earned operating income of $50,000 on $1,000,000 of sales. Required a. Compute Sorrento's profit margin for Year 2. b. Compute Sorrento's turnover for Year 2. c. Compute Sorrento's return on investment for Year 2. d. Recompute Sorrento’s ROI under each of the following independent assumptions: (1) (2) (3) Sales increase from $1,000,000 to $1,200,000, thereby resulting in an increase in operating income from $50,000 to $56,000. Sales remain constant, but Sorrento reduces expenses, resulting in an increase in operating income from $50,000 to $52,000. Sorrento is able to reduce its invested capital from $500,000 to $400,000 without affecting operating income.

Answer 1

a. profit margin = Net Net Operating go.come X 100 50% 50000 Xloo 1000000 b. Tumover Ratio Sales Operating Assets | 1000,ooo - 2 times Sooooo Retuon on Invesment - Net operating incomo X 100 = 50,000 x100 =10% 500,000 operating Assets d. 1 Retuon on Investment = 561000 x 100 500,000 11.20 2014 2) Return on investment = 52000 8100 Sooooo 10.40% 3) Return on investment = 50,000 8100 400,000 = 12.50%