Question

Fanning Corporation’s balance sheet indicates that the company has $550,000 invested in operating assets. During 2018, Fanning earned operating income of $60,500 on $1,100,000 of sales.

Required

1. Compute Fanning’s profit margin for 2018.

2. Compute Fanning’s turnover for 2018.

3. Compute Fanning’s return on investment for 2018.

4. Recompute Fanning’s ROI under each of the following independent assumptions:
   (1) Sales increase from $1,100,000 to $1,320,000, thereby resulting in an increase in operating income from $60,500 to $67,320.
   (2) Sales remain constant, but Fanning reduces expenses, resulting in an increase in operating income from $60,500 to $62,700.
   (3) Fanning is able to reduce its invested capital from $550,000 to $440,000 without affecting operating income.

Answer 1

Calculation of Profit Margin for 2018

Profit Margin = (Net Income/Net Sales)*100

= (60,500/1100000)*100

=5.50%

Fanning's turnover or sales for 2018 =  $1,100,000

Return on Investment = (Net Profit / Total Investment)*100

Net profit = Profit Margin * Sales

or, 5.50% * $1,100,000

= $60,500

Total Investment = $550,000

So Return on Investment = ($60,500/$550,000)*100

= 11%

Recomputation of Return on Investment (ROI) in the given cases

Case 1.

Profit Margin = ($67,320/$1,320,000)*100

= 5.10%

Net profit = Profit Margin * Sales

= 5.10%*$1,320,000

= $67,320

Return on Investment = ($67,320/$550,000)*100

= 12.24%

Case 2.

Net Profit = ($62,700./$1,00,000)*100

=5.70%

Net profit = Profit Margin * Sales

= 5.70%*$1,100,000

= $62,700

Return on Investment = ($62,700/$550,000)*100

= 11.40%

Case 3.

Net Profit remains same as specified earlier i.e  $60,500

Total Investment = $440,000

Return on Investment = ($60,500/$440,000)*100

= 13.75%