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There is an mcq in Bpp kit that
Fritwell has asset turnover of 2 and operating profit margin of 10%. It is It is launching a new product which is expected to generate additional sales of $1.6 million and additional profit of $120,000. It will require
additional assets of $500,000.
Assuming there are no other changes to current operations, how will the new product affect these ratios?Sir in solution they have they mentioned that new product will have ROCE of 120/500 = 24%
I just want to ask that while calculating ROCE (PBIT/CE) here they have taken 500 in denominator as an increase in Asset of 500 , but this increase in Asset of 500 will also be followed by decrease in cash of 500, won’t net effect of this be 0? I
Hi,
I can see what you are saying but it does say “additional” assets so this would mean that there is an increase in the assets and an increase in the capital employed.
If you look at capital employed in more detail then the net debt figure is interest bearing debt less cash, and as the cash has been spent then the figure will go up by the 500.
Thanks
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