Problem 9-20A
Sorrento Corporation’s balance sheet indicates that the company has $500,000 invested in operating assets. During 2018, Sorrento earned operating income of $50,000 on $1,000,000 of sales.
Required
- a. Compute Sorrento’s profit margin for 2018.
- b. Compute Sorrento’s turnover for 2018.
- c. Compute Sorrento’s return on investment for 2018.
- d. Recompute Sorrento’s ROI under each of the following independent assumptions:
- (1) Sales increase from $1,000,000 to $1,200,000, thereby resulting in an increase in operating income from $50,000 to $56,000.
- (2) Sales remain constant, but Sorrento reduces expenses, resulting in an increase in operating income from $50,000 to $52,000.
- (3) Sorrento is able to reduce its invested capital from $500,000 to $400,000 without affecting operating income.
a.
Calculate the profit margin of Corporation S.
Explanation of Solution
Operating profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.
Formula of operating profit margin:
Calculate the profit margin of Corporation S, if operating income is $50,000 and sales is $1,000,000.
Thus, the profit margin of Corporation S is 5%.
b.
Calculate the turnover of Corporation S.
Explanation of Solution
Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.
Formula of investment turnover:
Calculate the turnover of Corporation S, if operating assets is $500,000 and sales is $1,000,000.
Thus, the turnover of Corporation S is 2 times.
c.
Calculate the return on investment (ROI) of Corporation S.
Explanation of Solution
Calculate the ROI of Corporation S, if operating income is $50,000, and operating assets are $1,000,000.
Thus, the ROI of Corporation S is 10%.
d-1.
Calculate the ROI of Corporation S, if operating income increases to $56,000, and sales increases to $1,200,000.
Explanation of Solution
Formula of ROI according to DuPont formula:
Calculate the ROI of Corporation S, if operating income increases to $56,000, sales increases to $1,200,000, and operating assets remain at $500,000.
Thus, ROI of Corporation S is 11.21%.
2.
Calculate the ROI of Corporation S, if operating income increases to $52,000.
Explanation of Solution
Calculate the ROI of Corporation S, if operating income increases to $52,000, sales remain at $1,000,000, and operating assets remain at $500,000.
Thus, ROI of Corporation S is 10.4%.
3.
Calculate the ROI of Corporation S, if operating assets decreases to $400,000.
Explanation of Solution
Calculate the ROI of Corporation S, if operating assets decreases to $400,000, sales remain at $1,000,000, and operating income remains at $50,000.
Thus, ROI of Corporation S is 12.5%.
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Chapter 15 Solutions
Survey Of Accounting
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