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Chapter 22: 23E (page 1021)

L’Oréal reports the following for a recent year for the major divisions in its cosmetics branch. Total Assets Total A

€ millions

Sales

Income

Total assets end of the year

Total assets beginning of the year

Professional products

€2,717

€552

€2624

€2,516

Consumer products

9,530

1,765

5,994

5,496

Luxury products

4,507

791

3,651

4,059

Active cosmetics

1,386

278

830

817

Total

€18,140

€3,386

€13,099

€

1. Compute profit margin for each division. State your answers as percents, rounded to two decimal places. Which L’Oréal division has the highest profit margin?

2. Compute investment turnover for each division. Round your answers to two decimal places. Which L’Oréal division has the best investment turnover?

Short Answer

Expert verified

Division

Profit margin

Investment turnover

Professional product

20.31%

1.06

Consumer product

18.52%

1.66

Luxury product

17.55%

1.17

Active cosmetic

20.05%

1.68

Step by step solution

01

Definition of Profit Margin

A financial ratio that calculates the percentage of profit, i.e., determines the percentage of sales that is converted into profit by the business entity.

02

Profit margin for each division

Division

Income

/

Sales

X

100

=

Profit margin

Professional product

€552

/

€2,717

X

100

=

20.31%

Consumer product

1,765

/

9,530

X

100

=

18.52%

Luxury product

791

/

4,507

X

100

=

17.55%

Active cosmetic

278

/

1,386

X

100

=

20.05%

The professional product division reports the highest profit margin.

03

Investment turnover ratio for each division

Division

Sales

/

Average assets

=

Investment turnover

Professional product

€2,717

/

€2,570

=

1.06

Consumer product

9,530

/

5,745

=

1.66

Luxury product

4,507

/

3,855

=

1.17

Active cosmetic

1,386

/

823.5

=

1.68

Active cosmetic has the best investment turnover.

Working note:

Calculation of average assets:

Division

Opening assets

+

Ending assets

/

2

=

Average assets

Professional product

€2,516

+

€2,624

/

2

=

2,570

Consumer product

5,496

+

5,994

/

2

=

5,745

Luxury product

4,059

+

3,651

/

2

=

3,855

Active cosmetic

817

+

830

/

2

=

823.5

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Most popular questions from this chapter

Rita and Rick Redding own and operate a tomato grove. After preparing the following income statement, Rita and Rick are concerned about the loss on the No. 3 tomatoes.

RITA AND RICK REDDING

INCOME STATEMENT

For Year Ended December 31, 2017

Particular

No 1

No 2

No 3

Combined

Sales (by grade)

No. 1: 500,000 Ibs. @ \(1.80/lb

\)900,000

No. 2: 400,000 Ibs. @ \(1.25/lb

\)500,000

No. 3: 100,000 Ibs. @ \(0.40/lb

\)40,000

Total sales

\(1,440,000

Costs

Land preparation, seeding, and cultivating @ \)0.70/Ib

350,000

280,000

70,000

700,000

Harvesting, sorting, and grading @ \(0.04/Ib

20,000

16,000

4,000

40,000

Delivery Cost

10,000

7,000

3,000

20,000

Total cost

380,000

303,000

77,000

760,000

Net income (Loss)

\)520,000

\(197,000

(\)37,000)

\(680,000

In preparing this statement, Rita and Rick allocated joint costs among the grades on a physical basis as an equal amount per pound. Also, their delivery cost records show that \)17,000 of the \(20,000 relates to crating the No. 1 and No. 2 tomatoes and hauling them to the buyer. The remaining \)3,000 of delivery costs is for crating the No. 3 tomatoes and hauling them to the cannery.

Required

1. Prepare reports showing cost allocations on a sales value basis to the three grades of tomatoes. Separate the delivery costs into the amounts directly identifiable with each grade. Then allocate any shared delivery costs on the basis of the relative sales value of each grade. (Round percents to the nearest one-tenth and dollar amounts to the nearest whole dollar.)

2. Using your answers to part 1, prepare an income statement using the joint costs allocated on a sales value basis.

Analysis Component

3. Do you think delivery costs fit the definition of a joint cost? Explain.

Define and describe cycle efficiency.

Woh Che Co. has four departments: materials, personnel, manufacturing, and packaging. In a recent month, the four departments incurred three shared indirect expenses. The amounts of these indirect expenses and the bases used to allocate them follow.

Indirect expenses

Cost

Allocation Base

Supervision

\(82,500

Number of Employees

Utilities

50,000

Square feet occupied

Insurance

22,500

Value of assets in use

Total

\)155,000

Departmental data for the company’s recent reporting period follow.

Department

Employees

Square feet

Asset values

Material

27

25,000

\(6,000

Personnel

9

5,000

1,200

Manufacturing

63

55,000

37,800

Packaging

51

15,000

15,000

Total

150

100,000

\)60,000

1. Use this information to allocate each of the three indirect expenses across the four departments.

2. Prepare a summary table that reports the indirect expenses assigned to each of the four departments.

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 50,000 units of RX5 follows.

Direct materials . \( 5.00

Direct labor 8.00

Overhead . 9.00

Total cost per unit \)22.00

Check (1) Incremental cost

to make RX5, \(740,000

Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the 50,000 units of RX5 for \)18.00 per unit.

Required

1. Determine whether the company should make or buy the RX5.

2. What factors besides cost must management consider when deciding whether to make or buy RX5?

Williams Company began operations in January 2017 with two operating (selling) departments and one service (office) department. Its departmental income statements follow.

WILLIAMS COMPANY
Departmental Income Statements
For Year Ended December 31, 2017

Particular

Clock

Mirror

Combined

Sales

\(130,000

\)55,000

\(185,000

Cost of goods sold

63,700

34,100

97,800

Gross profit

66,300

20,900

87,200

Direct expenses

Sales salaries

20,000

7,000

27,000

Advertising

1,200

500

1,700

Store supplies used

900

400

1,300

Depreciation – equipment

1,500

300

1,800

Total direct expenses

23,600

8,200

31,800

Allocated expenses

Rent expenses

7,020

3,780

10,800

Utilities expenses

2,600

1,400

4,000

Share of office department expenses

10,500

4,500

15,000

Total allocated expenses

20,120

9,680

29,800

Total expenses

43,720

17,880

61,600

Net income

22,580

3,020

25,600

Williams plans to open a third department in January 2018 that will sell paintings. Management predicts that the new department will generate \)50,000 in sales with a 55% gross profit margin and will require the following direct expenses: sales salaries, \(8,000; advertising, \)800; store supplies, \(500; and equipment depreciation, \)200. It will fit the new department into the current rented space by taking some square footage from the other two departments. When opened, the new painting department will fill one-fifth of the space presently used by the clock department and one-fourth used by the mirror department. Management does not predict any increase in utilities costs, which are allocated to the departments in proportion to occupied space (or rent expense). The company allocates office department expenses to the operating departments in proportion to their sales. It expects the painting department to increase total office department expenses by $7,000. Since the painting department will bring new customers into the store, management expects sales in both the clock and mirror departments to increase by 8%. No changes for those departments’ gross profit percents or their direct expenses are expected except for store supplies used, which will increase in proportion to sales.

Required

Prepare departmental income statements that show the company’s predicted results of operations for calendar-year 2018 for the three operating (selling) departments and their combined totals. (Round percents to the nearest one-tenth and dollar amounts to the nearest whole dollar.)
See all solutions

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