Question

(Analyzing operating return on assets) The D.A. Winston Corporation earned an operating profit margin of 10.8 percent based on sales of $11.4 million and total assets of $5.7 million last year. a. What was Winston's total asset turnover ratio? b. During the coming year the company president has set a goal of attaining a total asset turnover of 3.2. How much must firm sales rise, other things being the same, for the goal to be achieved? (State your answer in both dollars and percentage increase in sales.) c. What was Winston's operating return on assets last year? Assuming the firm's operating profit margin remains the same, what will the operating return on assets be next year if the total asset turnover goal is achieved?

Answer 1

(a)

Total assets turnover ratio = sales/total assets

= $11,400,000/$5,700,000

= 2 times

(b)

sales = total assets x total assets turnover ratio

= $5,700,000 x 3.2

= $18,240,000

therefore, the sales must rise by $18,240,000 - $11,400,000 = 6,840,000

or in % = 6,840,000/$11,400,000 = 60%

(c)

for last year,

operating return on asset = operating profit/total assets

= ($11,400,000 x 10.8%)/$5,700,000

= 21.6%

for next year,

operating return on asset = operating profit/total assets

= ($18,240,000 x 10.8%)/$5,700,000

= 34.56%