Fern Company has a target rate of return of 19%, an ROI of 31%, and capital turnover of 2.9. The sales margin for Fern Company may be closest to
A)7%.
B)11%.
C)90%.
D)55%.

Question

Quizplus · Accepted Answer

The formula for ROI is:
ROI = Sales Margin x Capital Turnover
31% = Sales Margin x 2.9
Sales Margin = 31%/2.9
Sales Margin = 10.69%
To achieve a target rate of return of 19%, the company needs to add 19% - 10.69% = 8.31% to the sales margin.
Therefore, the sales margin should be 10.69% + 8.31% = 19%.
Since the answer choices are in percentages, we need to convert the sales margin from a decimal to a percentage by multiplying by 100.
The closest answer choice to 19% is B) 11%.

Fern Company Has a Target Rate of Return of 19