Question

A company’s shipping division (an investment center) has sales of \(2,420,000, net income of \)516,000, and average invested assets of $2,250,000. Compute the division’s profit margin and investment turnover.

Short answer

Profit margin:21.32%

Investment turnover ratio:1.07 times

Step-by-step solution

Definition of Net Income

After adjusting all the expenses, including tax and interest expenses, the income remaining with the business entity is known as net income. It is reported at the bottom line of the income statement.

Calculation of profit margin

$$\begin{gathered} \text{Profitmargin}=\frac{\text{Netincome}}{\text{Sales}}\times 100 \\ =\frac{\$516,000}{\$2,420,000}\times 100 \\ =21.32\% \end{gathered}$$

Calculation of investment turnover

$$\begin{gathered} \text{Investmentturnoverratio}=\frac{\text{Sales}}{\text{Averageinvestedassets}} \\ =\frac{\$2,420,000}{\$2,250,000} \\ =1.07\text{times} \end{gathered}$$