Sales $7,000,000
Cost of goods sold. 4,500,000
Gross profit $2,500,000
Administrative expenses 750,000
Income from operations $1,750,000
The manager of the Consumer Products Division is considering ways to increase the rate of return on investment.
a. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment of the Consumer Products Division, assuming that $5,000,000 of assets have been invested in the Consumer Products Division.
b. If expenses could be reduced by $350,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and rate of return on investment for the Consumer Products Division?
Answer:
a. Rate of Return
on Investment = Profit Margin × Investment Turnover
Rate of Return = Income from Operations
on Investment Sales Invested Assets
ROI = $1,750,000 × $7,000,000
ROI = 25% × 1.40
ROI = 35%
b. The profit margin would increase from 25% to 30%, the investment turnover
would remain unchanged, and the rate of return on investment would increase
from 35% to 42%, as shown below.
Rate of Return
on Investment = Profit Margin × Investment Turnover
Rate of Return
on Investment =
ROI = $2,100,000 *
ROI = 30% × 1.40
ROI = 42%
* $1,750,000 + $350,000