Chapter 24: 8SE (page 1357)

Refer to the information in Short Exercise S24-7.
Requirements
1. Compute each division’s asset turnover ratio (round to two decimal places). Interpret your results.
2. Use your answers to Requirement 1, along with the profit margin ratio, to recalculate ROI using the expanded formula. Do your answers agree with the basic ROI in Short Exercise S24-7?

Short Answer

Expert verified

The asset turnover ratio of Snow sports is1.34 times and non-snow sports is 1.39 times. The ROI of Snow sports is 24.12% and non-snow sports is 25.02%

Step by step solution

Computation of asset turnover ratio

$\begin{matrix} Assets Turn over Ratio of Snow Sports = \frac{Net Sales}{Average total assets} \\ = \frac{5, 500, 000}{4, 100, 000} \\ = 1.34 times \end{matrix}$

$\begin{matrix} AssetsTurn over Ratio of Non Snow Sports = \frac{Net Sales}{Average total assets} \\ = \frac{8, 500, 000}{6, 100, 000} \\ = 1.39 times \end{matrix}$

Computation of Return on Investment

$\begin{matrix} Return on Investment of Snow Sports = Profit Margin Ratio \times Asset Turn over Ratio \\ = 18 \times 1.34 \\ = 24.12 % \end{matrix}$

$\begin{matrix} Return on Investment of Non Snow Sports = Profit Margin Ratio \times Asset Turn over Ratio \\ = 18 \times 1.39 \\ = 25.02 % \end{matrix}$

There is a slight difference between the basic ROI and the ROI computed using the expanded formulae.

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Forever Free, Inc
Income Statement
For the year ended December 31, 2018

Net Sales revenue	\( 3,500,000
Cost of Goods Sold	2,200,000
Gross Profit	1,300,000
Operating Expenses	950,000
Operating Income	350,000
Other income and (expenses)
Interest Expense	(27,000)
Income before income tax expense	323,000
Income tax expense	113,050
Net Income	\) 209,950

Forever Free, Inc
Income Statement
For the year ended December 31, 2018
	2018	2017
Assets
Cash	\( 64,000	\) 52,000
Accounts Receivable	49,200	17,800
Supplies	1,000	400
Property, Plant, and Equipment, net	331,800	229,800
Patents, net	135,000	119,000
Total Assets	\( 581,000	\) 419,000
Liabilities and Stockholders’ Equity
Accounts Payable	\( 17,000	\) 19,000
Short-term Notes Payable	136,000	42,000
Long-term Notes Payable	184,000	114,500
Common Stock, no Par	232,000	242,000
Retained Earnings	12,000	1,500
Total Liabilities and Stockholders’ Equity	\( 581,000	\) 419,000

Short Answer

Step by step solution

Computation of asset turnover ratio

Computation of Return on Investment

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