he condensed income statement for the Consumer Products Division of Milner Industries Inc. is as follows

The condensed income statement for the Consumer Products Division of Milner Industries Inc. is as follows (assuming no service department charges):

Sales                                  $7,000,000
Cost of goods sold.             4,500,000
Gross profit                       $2,500,000
Administrative expenses       750,000
Income from operations   $1,750,000

The manager of the Consumer Products Division is considering ways to increase the rate of return on investment.

a. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment of the Consumer Products Division, assuming that $5,000,000 of assets have been invested in the Consumer Products Division.

b. If expenses could be reduced by $350,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and rate of return on investment for the Consumer Products Division?


Answer:


a. Rate of Return 
on Investment   =   Profit Margin × Investment Turnover 
Rate of Return   = Income from Operations 
on Investment Sales Invested Assets 
ROI   = $1,750,000 × $7,000,000 
ROI   =   25% × 1.40 
ROI   =   35% 
b. The profit margin would increase from 25% to 30%, the investment turnover 
would remain unchanged, and the rate of return on investment would increase 
from 35% to 42%, as shown below. 
Rate of Return 
on Investment   =   Profit Margin × Investment Turnover 
Rate of Return 
on Investment   = 
ROI   = $2,100,000 * 
ROI   =   30% × 1.40 
ROI   =   42% 
* $1,750,000 + $350,000