The annual sales for Salco, Inc. were million last year. Thefirm's end-of-year balance sheet was as follows:
Question:
The annual sales for Salco, Inc. were million last year. Thefirm's end-of-year balance sheet was as follows:
Current assets | $509,000 | Liabilities | $994,000 |
Net fixed assets | 1479000 | Owners' equity | 994000 |
Total Assets | $1,988,000 | Total | $1,988,000 |
Salco's income statement for the year was as follows:
Sales | $4,440,000 |
Less: Cost of goods sold | (3,510,000) |
Gross profit | $930,000 |
Less: Operating expenses | (495,000) |
Net operating income | $435,000 |
Less: Interest expense | (90,000) |
Earnings before taxes | $345,000 |
Less: Taxes (35%) | (120,750) |
Net income | $224,250 |
A) Calculate Salco's total asset turnover, operating profitmargin, and operating return on assets.
B) Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of $1.06 million. The firm will maintain its present debt ratio of 50 percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.7 percent. What will be the new operating return on assets ratio(i.e., net operating income÷total assets) for Salco after theplant's renovation?
C) Given that the plant renovation in part (B) occurs andSalco's interest expense rises by $50,000 per year, what will be the return earned on the common stockholders' investment? Compare this rate of return with that earned before the renovation. Based on this comparison, did the renovation have a favorable effect on the profitability of the firm?
Cornerstones of Managerial Accounting
ISBN: 978-0324660135
3rd Edition
Authors: Mowen, Hansen, Heitger