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Norris Company

Required:
(A.) Calculate the company's sales margin, capital turnover, and return on investment for 20x1.
(B.) If the sales and average invested capital remain the same, to what level would total costs and expenses have to be reduced in 20x2 to achieve a 15% return on investment?
(C.) Assume that costs and expenses are reduced, as calculated in requirement "B." Calculate the firm's new sales margin.
(D.) Suggest two possible actions that will improve the company's capital turnover.

Papa Fred's Pizza store no. 16 has fallen on hard times and is about to be closed. The following figures are available for the period just ended:

All employees except the store manager would be discharged. The manager, who earns $27,000 annually, would be transferred to store no. 19 in a neighboring suburb. Also, no. 16's furnishings and equipment are fully depreciated and would be removed and transported to Papa Fred's warehouse at a cost of $2,800.
Required:
(A.) What is store no. 16's reported loss for the period just ended?
(B.) Should the store be closed? Why?
(C.) Would Papa Fred's likely lose all $205,000 of sales revenue if store no. 16 were closed? Explain.

The following data pertain to Polar Company's commercial snow thrower:

Required:
For each of the following cost bases, determine the appropriate percentage markup that will result in a price of $980 for the snow thrower. (Round percentages to nearest one-hundredth of a percent.)
(A.) Variable manufacturing cost.
(B.) Absorption manufacturing cost.
(C.) Total cost.
(D.) Total variable cost.

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Solution Preview

A. Calculation of the following ratios

i) Sales Margin = Net income/Sales

Where as
Sale = $1,000,000
Net income = $1,000,000 - $550,000 - $400,000
Net income = $50,000

Sales margin = $50,000/1,000,000

= 0.05 or 5%

Hence the Sales margin is 5%

ii) Capital turnover = Sales / invested Capital

Where as
Sales = $1,000,000
Invested Capital = $50,000

Capital turnover = $1,000,000 /$500,000

= 2 times

Hence the Capital turnover ratio is 2 times

iii) Return on investment = Net income / invested capital

Where as
Net income = 50,000
Invested Capital = $500,000

Return on investment = $50,000/$500,000

= 0.10 or 10%

Hence the Return on investment is10%

(B.) If the sales and average invested capital remain the same, to what level would total costs and expenses have to be reduced in 20x2 to achieve a 15% return on investment?

Solution: - Calculation of Total cost and expenses to reduce to achieve the 15% return on investment

Return on investment = Net income / invested capital

Where as
Net income = x
Invested Capital = $500,000
Return on investment = 15%
15% = x/$500,000
x = $500,000 * 0.15
x = 75,000

Total cost and expenses = Sales - net income
= $1,000,000 - $75,000
= ...

Solution Summary

The sales margin, capital turnover, and return on investment for Norris Company is determined.

$2.19