Question

University Hero is considering expanding operations beyond its healthy sandwiches. Jim Axelrod, vice president of marketing, would like to add a line of smoothies with a similar health emphasis. Each smoothie would include two free health supplements such as vitamins, antioxidants, and protein. Jim believes smoothie sales should help fill the slow mid-afternoon period. Adding the line of smoothies would require purchasing additional freezer space, machinery, and equipment. Jim provides the following projections of net sales, net income, and average total assets in support of his proposal.

	Sandwiches				Sandwiches
	Only				and Smoothies
Net sales	$	900,000			$	1,500,000
Net income		170,000				260,000
Average total assets		500,000				900,000

Required:

1. Calculate University Hero’s return on assets, profit margin, and asset turnover for sandwiches only.
  

2. Calculate University Hero’s return on assets, profit margin, and asset turnover for sandwiches and smoothies.
  

3. Based on these ratios, what recommendation would you make if University Hero is considering expanding operations beyond its healthy sandwiches?

Answer 1

1) Calculate following :

	Sandwiches only
Return on total assets	170000/500000 = 34%
Profit	170000/900000 = 18.89%
Asset turnover	900000/500000 = 1.8

2) Calculate following for sandwiches and smoothies

Return on assets	260000/900000 = 28.89%
Profit margin	260000/1500000 = 17.33%
Asset turnover	1500000/900000 = 1.67

3)No, Company should not expand their business they should sale only sandwiches