Refer to the figure above. Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately
A) 15%
B) 22%
C) 26%
D) 35%

Question

Quizplus · Accepted Answer

Return on assets (investment) is calculated using the DuPont method as:

Return on assets = (Net income / Sales) x (Sales / Average total assets)

From the given data, we have:

Net income = $400,000
Sales = $5,000,000
Average total assets = ($2,000,000 + $3,000,000) / 2 = $2,500,000

Therefore, Return on assets = ($400,000 / $5,000,000) x ($5,000,000 / $2,500,000) = 0.08 x 2 = 0.16 or 16%

However, in the figure, we see that Net income and Average total assets have been broken down further into their respective components. Thus, we can calculate Return on assets using the DuPont method as follows:

Return on assets = (Net income margin) x (Asset turnover)

Net income margin = Net income / Sales = ($100,000 + $200,000 + $100,000) / $5,000,000 = 0.06 or 6%
Asset turnover = Sales / Average total assets = $5,000,000 / $2,500,000 = 2

Therefore, Return on assets = 0.06 x 2 = 0.12 or 12%

Hence, the answer is C.

Refer to the Figure Above