Using the Strategic Profit Model construct a model (Hint: a good application for
ID: 468485 • Letter: U
Question
Using the Strategic Profit Model construct a model (Hint: a good application for Excel).
a. Calculate the Net Profit Margin, Asset Turnover and Return on Assets using:
b. What is the maximum allowable Inventory level before Return of Asset equals 0.05
please the answer should be clear and all steps must be shown thanks
$ thousands Sales 1000 Cost of Goods Sold 700 Variable Expenses 60 Fixed Expenses 120 Inventory 50 Accounts Receivable 100 Other Current Assets 150 Fixed Assets 1500Explanation / Answer
Question - A
Sales
1000
Cost of Goods Sold
700
Variable Expenses
60
Fixed Expenses
120
Inventory
50
Accounts Receivable
100
Other Current Assets
150
Fixed Assets
1500
Net Profit = Sales – Cost of Good sold – Fixed expenses – variable expenses
Net Profilt
Sales - All Expenses
120
Net Profilt Margin
Net Profit/Sales
12.00%
Asset turnover rato = Total Sales/ Total asset
Total Asset = (inventory+ recievable+ current asset+ fixed assets)
Asset Turnover Ratio
Sales Revenue/Total Asset
55.56%
Return on Asset = Net profit/Total Asset
Return on Asset
Net Profit/ Total Asset
6.667%
Question – B
Desired retun on Asset = 5%
Net Profit / Total Asset = 5%
120 / Total Asset = 5%
Total Asset = 120/ 5%= 2400
For a desired return on asset of 5%, maximum asset can be maintained is 2400
Deducting other assets (Recievable, Current asset and fixed asset) will give us maximum inventory that can be maintained
Inventory = 2400 – 1500 – 100 – 150 = 650
Sales
1000
Cost of Goods Sold
700
Variable Expenses
60
Fixed Expenses
120
Inventory
50
Accounts Receivable
100
Other Current Assets
150
Fixed Assets
1500