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

Answer a.

Sales = $1,100,000
Operating Income = $60,500

Profit Margin = Operating Income / Sales
Profit Margin = $60,500 / $1,100,000
Profit Margin = 5.50%

Answer b.

Sales = $1,100,000
Operating Assets = $550,000

Turnover = Sales / Operating Assets
Turnover = $1,100,000 / $550,000
Turnover = 2 times

Answer c.

Turnover = 2 times
Profit Margin = 5.50%

ROI = Turnover * Profit Margin
ROI = 2 * 5.50%
ROI = 11.00%

Answer d-1.

Sales = $1,320,000
Operating Income = $67,320

Profit Margin = Operating Income / Sales
Profit Margin = $67,320 / $1,320,000
Profit Margin = 5.10%

Operating Assets = $550,000

Turnover = Sales / Operating Assets
Turnover = $1,320,000 / $550,000
Turnover = 2.40 times

ROI = Turnover * Profit Margin
ROI = 2.4 * 5.10%
ROI = 12.24%

Answer d-2.

Sales = $1,110,000
Operating Income = $62,700

Profit Margin = Operating Income / Sales
Profit Margin = $62,700 / $1,110,000
Profit Margin = 5.65%

Operating Assets = $550,000

Turnover = Sales / Operating Assets
Turnover = $1,100,000 / $550,000
Turnover = 2.00 times

ROI = Turnover * Profit Margin
ROI = 2.0 * 5.65%
ROI = 11.30%

Answer d-3.

Sales = $1,100,000
Operating Income = $60,500

Profit Margin = Operating Income / Sales
Profit Margin = $60,500 / $1,100,000
Profit Margin = 5.50%

Operating Assets = $440,000

Turnover = Sales / Operating Assets
Turnover = $1,100,000 / $440,000
Turnover = 2.50 times

ROI = Turnover * Profit Margin
ROI = 2.50 * 5.50%
ROI = 13.75%