Question

Financial statement data for years ending December 31for Depuy company follow

Particulars	Year 2	Year 1
Sales	$5,510,000	$4,880,000
Fixed assets :
Beginning of year	16,00,000	14,50,000
End of year	2,200,000	16,00,000

(a) Determine the fixed asset turnover ratio for year 1 and year 2

(b)Does the change in the fixed asset turnover from year 1 to year 2 indicate a favorable or an unfavourable change?

 

 

Answer 1

Fixed asset turnover : It is a ratio that assesses the fixed assets' productive potential to create sales income for the firm. As a result, it demonstrates the link between net sales and average total fixed assets. The formula for calculating the ratio is as follows.

Fixed asset turnover = Sales / Average total fixed assets

Calculation of fixed asset turnover ratio for year 1

Fixed assets turnover = Sales / Average Fixed assets

                                   = $4,880,000 / $1,525,000

                                   = 3.2 times

Calculation of Average total fixed assets

Average total fixed assets = Total beginning fixed assets + Total ending fixed assets

=$14,50,000 + $16,00,000

=$15,25,000

Calculation of fixed asset turnover ratio for year 2

Fixed assets turnover = Sales / average fixed assets

                                   = $5,510,000 / $1,900,000

                                   =  2.9 times

Calculation of average total fixed assets

Average total fixed assets = Total beginning fixed assets + Total Ending fixed assets 

=$1,600,000 + $2,200,000 / 2

=$1,900,000

 

 

 

(a)Therefore, the fixed assets turnover for year 1 is 3.2 times and for year 2 is 2.9 times

(b)The change in the fixed asset turnover ratio from Year 1 to Year 2 is unfavourable , with the ratio decreasing from 3.2 to 2.9 times. This is due to the company's poor use of fixed assets, which resulted in lesser revenue creation.