Question

Problem 15-22 Return on investment LO 15-6

Benson Corporation’s balance sheet indicates that the company has $530,000 invested in operating assets. During 2018, Benson earned operating income of $56,180 on $1,060,000 of sales.

Required

1. Compute Benson’s profit margin for 2018.

2. Compute Benson’s turnover for 2018.

3. Compute Benson’s return on investment for 2018.

4. Recompute Benson’s ROI under each of the following independent assumptions:
   (1) Sales increase from $1,060,000 to $1,272,000, thereby resulting in an increase in operating income from $56,180 to $69,960.
   (2) Sales remain constant, but Benson reduces expenses, resulting in an increase in operating income from $56,180 to $58,300.
   (3) Benson is able to reduce its invested capital from $530,000 to $424,000 without affecting operating income.

Answer 1

Answer A to C
Operating income	$            56,180
Divided by: Sales	$      1,060,000
Profit margin	5.30%
Sales	$      1,060,000
Divided by: Operating assets	$          530,000
Turnover	2.00
Profit margin	5.30%
Multiply: Turnover	2.00
Return on investment	10.60%
Answer D1
Operating income	$            69,960
Divided by: Sales	$      1,272,000
Profit margin	5.50%
Sales	$      1,272,000
Divided by: Operating assets	$          530,000
Turnover	2.40
Profit margin	5.50%
Multiply: Turnover	2.40
Return on investment	13.20%
Answer D2
Operating income	$            58,300
Divided by: Sales	$      1,060,000
Profit margin	5.50%
Sales	$      1,060,000
Divided by: Operating assets	$          530,000
Turnover	2.00
Profit margin	5.50%
Multiply: Turnover	2.00
Return on investment	11.00%
Answer D3
Operating income	$            56,180
Divided by: Sales	$      1,060,000
Profit margin	5.30%
Sales	$      1,060,000
Divided by: Operating assets	$          424,000
Turnover	2.50
Profit margin	5.30%
Multiply: Turnover	2.50
Return on investment	13.25%