Extreme Sports Company makes snowboards, downhill skis, cross-country skis,skateboards, surfboards, and inline skates. The company has found
Question:
Extreme Sports Company makes snowboards, downhill skis, cross-country skis,skateboards, surfboards, and inline skates. The company has found it beneficial to split operations into two divisions based on the climate required for the sport: Snow Sports and Non-snow Sports.
The following divisional information is available for the past year:
Snow Sports
Net Sales Revenue 5,700,000
Operating Income 969,000
Average Total Assets 4,700,000
Basic ROI 20.6%
Profit Margin Ratio 17%
Non-snow Sports
Net Sales Revenue 8,600,000
Operating Income 1,462,000
Average Total Assets 6,700,000
Basic ROI 21.8%
Profit Margin ROI 17%
Extreme's management has specified a 14% target rate of return.
Requirements
1. Compute each division's asset turnover ratio (round to two decimal places). Interpret your results.
Begin by selecting the formula to calculate the asset turnover, and then enter the amounts to calculate each division's asset turnover.
2. Use your answers to Requirement 1, along with the profit margin ratio, to recalculate ROI using the expanded formula. Do the answers agree with the basic ROI?
Financial Management for Decision Makers
ISBN: 978-0138011604
2nd Canadian edition
Authors: Peter Atrill, Paul Hurley