Question

The annual sales for​ Salco, Inc. were $ 4.55 million last year. The​ firm's end-of-year balance sheet was as​ follows: Current assets $499,000 Liabilities $1,001,500 Net fixed assets 1504000 Owners' equity 1001500 Total Assets $2,003,000 Total $2,003,000  LOADING.... ​ Salco's income statement for the year was as​ follows: Sales $4,550,000 Less: Cost of goods sold (3,506,000) Gross profit $1,044,000 Less: Operating expenses (495,000) Net operating income $549,000 Less: Interest expense (101,000) Earnings before taxes $448,000 Less: Taxes (35%) (156,800) Net income $291,200  LOADING.... a. Calculate​ Salco's total asset​ turnover, operating profit​ margin, and operating return on assets. b.  Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of $ 1.08 million. The firm will maintain its present debt ratio of 50 percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.5 percent. What will be the new operating return on assets ratio​ (i.e., net operating income divided by total ​assets) for Salco after the​ plant's renovation? c.  Given that the plant renovation in part ​(b​) occurs and​ Salco's interest expense rises by $ 48 comma 000 per​ year, what will be the return earned on the common​ stockholders' investment? Compare this rate of return with that earned before the renovation. Based on this​ comparison, did the renovation have a favorable effect on the profitability of the​ firm? a.  Calculate​ Salco's total asset​ turnover, operating profit​ margin, and operatin

Answer 1

	Existing	Basis for Projections	Proposed
Sales	4550000		4550000
Less: COGS	3506000
Gross profit	1044000
Less: Operating expenses	495000
Net operating income	549000	13.5% of sales	614250
Less: Interest expense	101000	+48000	149000
Earnings before taxes	448000		465250
Less: Taxes (35%)	134400		139575
Net income	313600		325675
Current assets	499000
Net fixed assets	1504000
Total assets	2003000	+1080000	3083000
Liabilities	1001500
Owners' equity	1001500
Total liabilities and equity	2003000
RATIOS:
Total asset turnover (Sales/Total Assets)	2.27		1.48
Operating profit margin (Operating profit/Sales)	12.07%		13.50%
Operating return on assets (Operating profit/Total Assets)	27.41%		19.92%
EVALUATION:
The renovation had an unfavorable effect on the profitability of the firm as the Operating return on Total
Assets has decreased drastically from 27.41% to 19.92%.