By how much must a firm reduce its assets in order to improve ROA from 10 percent to 12 percent if the firm's profit margin is 5 percent on sales of $4 million?
A)$240,000
B)$333,333
C)$400,000
D)$516,167 current ROA = (sales/assets) x profit margin
)10 = ($4 million/assets) x .05
)10 = $200,000/assets
$2 million = assets
Proposed ROA = (sales/assets) x profit margin
)12= ($4 million/assets) x .05
)12 = $200,000/assets
$1,666,667 = assets

Question

Quizplus · Accepted Answer

To improve ROA from 10% to 12%, the firm needs to reduce its assets so that the new assets result in a net income of $480,000 ($4 million x 12%).

Current assets = $4 million/10% = $40 million 
New assets = $480,000/5% = $9.6 million

Amount of reduction in assets = $40 million - $9.6 million = $30.4 million

Therefore, the firm must reduce its assets by $30.4 million, which is closest to answer choice B ($333,333).

By How Much Must a Firm Reduce Its Assets in Order