When determining the rate of return on assets:
A)the DuPont model breaks return on assets down into three component ratios that drive it.
B)the DuPont model calculates the rate of return on assets as the net profit margin ratio times total asset turnover.
C)it is important for companies to develop strategies to decrease total asset turnover.
D)total asset turnover measures how much every sales dollar generates in profit.

Question

Quizplus · Accepted Answer

The DuPont model uses the net profit margin ratio (which measures net income as a percentage of sales) and total asset turnover (which measures sales as a percentage of total assets) to calculate the rate of return on assets. Therefore, choice B is correct. Choices A and C are incorrect, as the DuPont model breaks down return on assets into two component ratios (not three), and decreasing total asset turnover may not always be the best strategy. Choice D is incorrect, as total asset turnover measures how much in sales a company generates for every dollar of assets, not how much profit.

When Determining the Rate of Return on Assets