New Financial Ratios

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August 10, 2024 at 8:17 pm #709469
dangkhoa.nhhtd
Participant
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Hello tutor,

“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?”

I do not understand why the solution of that question is like this “The new product will have an operating profit of 120 1 1,600 = 7.5%, so will reduce the current margin. It will have a ROCE of 120 I 500 = 24%, higher than the current 20%.”

I think the solution does not make sense, as the numbers are all additional, not the new figures after the company sells the new product.

Thank you tutor!
August 17, 2024 at 8:40 am #709937
P2-D2
Keymaster
- Topics: 4
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Hi,

We only need to look at the incremental element to be able to see the impact on the current ratios we have.

You can add in the additional numbers to the original ratios but you will still get the same conclusions.

Thanks
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