The Perez Company had a 12.5% return on a $100,000 investment in new equipment.The investment resulted in increased sales,and the resultant increase in income amounted to 5% of sales.The turnover (asset utilization)was:
A) 1.
B) 17.5.
C) 2.5.
D) 7.5.

Question

Quizplus · Accepted Answer

Asset turnover (or utilization) is calculated by dividing sales by total assets.

In this scenario, we know that the investment of $100,000 resulted in increased sales, and the increase in income amounted to 5% of sales.

Let's assume the original sales were x.

The increase in sales would then be 0.05x (5% of x), and the total sales after the investment would be x + 0.05x = 1.05x.

Since we know the return on investment was 12.5%, the total income generated from the investment would be 0.125($100,000) = $12,500.

We also know that the increase in income amounted to 5% of sales, so the increase in income would be 0.05(1.05x) = 0.0525x.

Therefore:

Total income = $12,500 + 0.0525x

Total assets = $100,000

Now we can use the formula for asset turnover:

Asset turnover = Sales / Total assets

Asset turnover = (x + 0.05x) / $100,000

Asset turnover = 1.05x / $100,000

Substituting for x:

Asset turnover = 1.05($12,500 - $12,500/0.0525) / $100,000

Asset turnover = 1.05($238,095.24) / $100,000

Asset turnover = 2.5

Therefore, the answer is C: 2.5.

The Perez Company Had a 12