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23E

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Financial & Managerial Accounting
Found in: Page 1021
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

L’Oréal reports the following for a recent year for the major divisions in its cosmetics branch. Total Assets Total A

€ millions

Sales

Income

Total assets end of the year

Total assets beginning of the year

Professional products

€2,717

€552

€2624

€2,516

Consumer products

9,530

1,765

5,994

5,496

Luxury products

4,507

791

3,651

4,059

Active cosmetics

1,386

278

830

817

Total

€18,140

€3,386

€13,099

1. Compute profit margin for each division. State your answers as percents, rounded to two decimal places. Which L’Oréal division has the highest profit margin?

2. Compute investment turnover for each division. Round your answers to two decimal places. Which L’Oréal division has the best investment turnover?

Division

Profit margin

Investment turnover

Professional product

20.31%

1.06

Consumer product

18.52%

1.66

Luxury product

17.55%

1.17

Active cosmetic

20.05%

1.68

See the step by step solution

Step by Step Solution

Definition of Profit Margin

A financial ratio that calculates the percentage of profit, i.e., determines the percentage of sales that is converted into profit by the business entity.

Profit margin for each division

Division

Income

/

Sales

X

100

=

Profit margin

Professional product

€552

/

€2,717

X

100

=

20.31%

Consumer product

1,765

/

9,530

X

100

=

18.52%

Luxury product

791

/

4,507

X

100

=

17.55%

Active cosmetic

278

/

1,386

X

100

=

20.05%

The professional product division reports the highest profit margin.

Investment turnover ratio for each division

Division

Sales

/

Average assets

=

Investment turnover

Professional product

€2,717

/

€2,570

=

1.06

Consumer product

9,530

/

5,745

=

1.66

Luxury product

4,507

/

3,855

=

1.17

Active cosmetic

1,386

/

823.5

=

1.68

Active cosmetic has the best investment turnover.

Working note:

Calculation of average assets:

Division

Opening assets

+

Ending assets

/

2

=

Average assets

Professional product

€2,516

+

€2,624

/

2

=

2,570

Consumer product

5,496

+

5,994

/

2

=

5,745

Luxury product

4,059

+

3,651

/

2

=

3,855

Active cosmetic

817

+

830

/

2

=

823.5

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