Question

The Dry Wall Division reports the following operating data for the past two years:

		Year 1				Year 2
Margin		15	%			?
Turnover		2.6				3
Average operating assets		?			$	150,500
Net operating income	$	40,500				?
Stockholders’ equity	$	80,500			$	125,500
Sales		?				?

The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.

The margin in Year 2 was:

Answer 1

Year - 1 .

>> Year - 1 : Sales = Net profit / Margin

>> Year - 1 : Sales = $ 40,500 / 15 %

>> Year - 1 : Sales = $ 270,000.

>> Year -1 : Average Operating asset = Sales / Turnover

>> Year -1 : Average Operating asset = $ 270,000 / 2.6

>> Year -1 : Average Operating asset = $ 103,846.

>> Year - 1: Return on Investment = Net income / Average operating asset

>> Year - 1: Return on Investment = ( $ 40,500 * 100 ) / $ 103,846

>> Year - 1: Return on Investment = 39 %.

Year - 2

>> Year -2 return on investment and year - 1 return on investment is same

>> Year - 2 : Net profit = Average operating asset * Return on investment

>> Year - 2 : Net profit = $ 150,500 * 39 %

>> Year - 2 : Net profit = $ 58,695.

>> Year - 2 : Sales = Turnover * Average operating asset

>> Year - 2 : Sales = 3 * $ 150,500

>> Year - 2 : Sales = $ 451,500.

>> Year - 2 : Margin = Net profit / Sales

>> Year - 2 : Margin = ( $ 58,695 *100 ) / $ 451,500

>> Year - 2 : Margin = 13 %