Question

Intra Corp. has the following operating data for the past 2 years: Year 1 Year 2 Return on Investment 10% 25% Residual Income $600 ? Required Rate of return 8% 10% Average operating assets ? $42,000 Sales in year 2 is $60,000 more than sales in year 1. The Company had the same capital turnover in both years.

(Q.) What is the sales margin in Year 2? Use two decimal places in the answer (for example, if the answer is 24%, key in "0.24").

(A.)

Answer 1

Answer:

Year 1:

Return on Investment = Net Operating Income / Average Operating Assets
0.10 = Net Operating Income / Average Operating Assets
Net Operating Income = 0.10 * Average Operating Assets

Residual Income = Net Operating Income - Required Rate of Return * Average Operating Assets
$600 = 0.10 * Average Operating Assets - 0.08 * Average Operating Assets
$600 = 0.02 * Average Operating Assets
Average Operating Assets = $30,000

Net Operating Income = 0.10 * Average Operating Assets
Net Operating Income = 0.10 * $30,000
Net Operating Income = $3,000

Capital Turnover = Sales / Average Operating Assets
Capital Turnover = Sales / $30,000

Year 2:

Return on Investment = Net Operating Income / Average Operating Assets
0.25 = Net Operating Income / $42,000
Net Operating Income = $10,500

Capital Turnover = Sales / Average Operating Assets
Capital Turnover = Sales / $42,000

Capital Turnover, Year 1 = Capital Turnover, Year 2
Sales, Year 1 / Average Operating Assets, Year 1 = Sales, Year 2 / Average Operating Assets, Year 2
Sales, Year 1 / $30,000 = Sales, Year 2 / $42,000
Sales, Year 1 / 5 = Sales, Year 2 / 7
7 * Sales, Year 1 = 5 * Sales, Year 2
7 * Sales, Year 1 = 5 * (Sales, Year 1 + $60,000)
7 * Sales, Year 1 = 5 * Sales, Year 1 + $300,000
2 * Sales, Year 1 = $300,000
Sales, Year 1 = $150,000

Sales, Year 2 = Sales, Year 1 + $60,000
Sales, Year 2 = $150,000 + $60,000
Sales, Year 2 = $210,000

Sales Margin = Net Operating Income / Sales
Sales Margin = $10,500 / $210,000
Sales Margin = 0.05