Concept explainers
a.
Determine the fixed asset Turnover Ratio of Company D for Year 1 ad Year 2.
a.
Explanation of Solution
Fixed Asset turnover: It is a ratio that measures the productive capacity of the fixed assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets. The following is the formula to calculate the ratio:
Calculate the fixed asset turnover ratio:
For Year 1
Sales= $4,880,000
Total average fixed assets= $1,525,000 (1)
Working note 1: Calculate the average total fixed assets.
Beginning total fixed assets = $1,450,000
Ending total fixed assets = $1,600,000
For Year 2
Sales= $5,510,000
Total average fixed assets= $1,900,000 (2)
Working note 2: Calculate the average total fixed assets.
Beginning total fixed assets = $1,600,000
Ending total fixed assets = $2,200,000
Hence, the fixed asset turnover ratio for Year 1 is 3.2 times and for Year 2 is 2.9 times.
b.
Explain whether the change in the fixed asset turnover ratio from Year 1 to Year 2 indicates a favorable or unfavorable change.
b.
Explanation of Solution
The change in the fixed asset turnover ratio from Year 1 to Year 2 indicates an unfavorable change as the ratio decreased from 3.2 to 2.9 times. This is because, the company has inefficienctly utilized the fixed assets that resulted in a lower revenue generation.
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Chapter 10 Solutions
Financial Accounting
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