The profit margin, investment turnover, and rate of return: calculation

To calculate the profit margin, investment turnover, and rate of return on investment using the DuPont formula for the company in 2019 and 2020, we will use the following formulas:

Profit Margin = Income from Operations / Sales
Investment Turnover = Sales / Invested Assets
Rate of Return on Investment = Profit Margin x Investment Turnover

Let’s calculate each measure for both years:

2019:

Profit Margin = $305,700 / $420,000 = 0.7286 or 72.86%
Investment Turnover = $420,000 / $1,255,000 = 0.3347 or 33.47%
Rate of Return on Investment = 72.86% x 33.47% = 24.39%

2020:

Profit Margin = $320,000 / $456,000 = 0.7018 or 70.18%
Investment Turnover = $456,000 / $1,270,000 = 0.3591 or 35.91%
Rate of Return on Investment = 70.18% x 35.91% = 25.20%

Now let’s analyze the changes in the rate of return on investment:

Change in Rate of Return on Investment = (Rate of Return on Investment in 2020 – Rate of Return on Investment in 2019) / Rate of Return on Investment in 2019

Change in Rate of Return on Investment = (25.20% – 24.39%) / 24.39% = 0.0332 or 3.32%

The change in the rate of return on investment is positive and equals 3.32%. This indicates that the rate of return on investment improved from 2019 to 2020. Therefore, the change in the rate of return on investment is considered favorable.

In conclusion, the company experienced an increase in the rate of return on investment from 2019 to 2020, indicating improved profitability and efficiency in utilizing its invested assets.