One approach to projecting operating profit is to determine a company’s average operating profit margin over the previous several years and apply that margin to a forecast of the company’s sales. Use the following information on three companies to answer Questions 1 and 2 below:

• Johnson & Johnson (JNJ). Th is US health care conglomerate, founded in 1887, had 2009 sales of around $61.9 billion from its three main businesses: pharmaceuticals, medical devices and diagnostics, and consumer products.

• BHP Billiton (BHP). Th is company, with group headquarters in Australia and secondary headquarters in London, is the world’s largest natural resources company, reporting revenue of approximately US$50.2 billion for the fiscal year ended June 2009. The company mines, processes, and markets coal, copper, nickel, iron, bauxite, and silver and also has substantial petroleum operations.

• Baidu. Th is Chinese company, which was established in 2000 and went public on NASDAQ in 2005, is the leading Chinese language search engine. The company’s revenues for 2009 were 4.4 billion renminbi (RMB), an increase of 40 percent from 2008 and more than 14 times greater than revenues in 2005.

1 . For each of the three companies, state and justify whether the suggested forecasting method (applying the average operating profit over the previous several years to a forecast of sales) would be a reasonable starting point for projecting future operating profit.

2 . Assume that the 2009 forecast of sales was perfect and, therefore, equal to the realized sales by the company in 2009. Compare the forecast of 2009 operating profit, using an average of the previous four years’ operating profit margins, with the actual 2009 operating profit reported by the company given the following additional information:

• JNJ: For the four years prior to 2009, JNJ’s average operating profit margin was approximately 25.0 percent. The company’s actual operating profit for 2009 was

$15.6 billion.

• BHP: For the four years prior to the year ending June 2009, BHP’s average operating profit margin was approximately 38.5 percent. The company’s actual operating profit for the year ended June 2009 was US$12.2 billion.

• Baidu: Over the four years prior to 2009, Baidu’s average operating profit margin was approximately 27.1 percent. The company’s actual operating profit for 2009 was RMB1.6 billion.

Using the additional information given, state and justify whether actual results support the usefulness of the stable operating margin assumption.