Nywening Ltd. (Nywening) operates in a highly competitive industry. Price is very important to most customers and it's very difficult for small operators such as Nywening to differentiate themselves on product quality. It's possible to differentiate based on service, but most competitors offer reasonably comparable service packages.
The president of Nywening is reviewing the company's performance in 2017. During 2017, sales increased by 15 percent to $875,000. Average total assets for the year were $487,500, net income was $50,000, and interest expense was $15,000. Nywening's tax rate is 20 percent.
The president believes that Nywening can improve its performance in 2018. She would like to see a 12 percent growth in sales in 2018 and a return on assets of 20 percent.
The president estimates that it will be necessary for the average amount of assets to increase by 10 percent in 2018. The president doesn't think that any additional borrowing will be required, and as a result, the interest expense for 2018 will be the same as for 2017.
a. Calculate Nywening's profit margin, asset turnover, and return on assets for 2017.
b. What asset turnover ratio is required in 2018 to achieve the president's objectives? What net income is needed to achieve her objectives? What would the profit margin be if the objectives are achieved? For the purposes of this question, use net income plus the after tax cost of interest to calculate profit margin.
c. Do you think the president's objectives are reasonable?