Sacha works for an organization that follows a decentralized model. Erin, the production manager of her business unit has come to Sacha to discuss the possibility of purchasing a new piece of equipment. Erin indicated that this new equipment could generate $23,500 of sales, and the expenses (after depreciation) to support it would be 70% of the new sales. After speaking to a supplier, Erin learns that the new equipment can be purchased for $15,750. What are the Profit Margin and the Investment Turnover for the new equipment?
A) Profit Margin: 0.30, Investment Turnover: 1.492
B) Profit Margin: 0.70, Investment Turnover: 1.044
C) Profit Margin: 1.044, Investment Turnover: 0.70
D) Profit Margin: 1.492, Investment Turnover: 0.30

Question

Quizplus · Accepted Answer

To answer this question, calculate both the Profit Margin and the Investment Turnover. Profit Margin is: Operating Income/Sales. Operating Income = $23,500 - ($23,500 × 70%) = $23,500 - $16,450 = $7,050. Profit Margin = $7,050/$23,500 = 0.30. Investment Turnover = Sales/Investment = $23,500/$15,750 = 1.492 (Choice A).

Sacha Works for an Organization That Follows a Decentralized Model