To calculate the Fixed Asset Turnover Ratio for Davenport Company for the years 20Y4 and 20Y5, we use the following formula:
\[ \text{Fixed Asset Turnover Ratio} = \frac{\text{Sales}}{\text{Average Fixed Assets}} \]
Where Average Fixed Assets is calculated as:
\[ \text{Average Fixed Assets} = \frac{\text{Beginning Fixed Assets} + \text{End Fixed Assets}}{2} \]
Step 1: Calculate Average Fixed Assets
For 20Y4:
- Beginning Fixed Assets (20Y4) = $580,000
- End Fixed Assets (20Y4) = $670,000
\[ \text{Average Fixed Assets (20Y4)} = \frac{580,000 + 670,000}{2} = \frac{1,250,000}{2} = 625,000 \]
For 20Y5:
- Beginning Fixed Assets (20Y5) = $670,000
- End Fixed Assets (20Y5) = $720,000
\[ \text{Average Fixed Assets (20Y5)} = \frac{670,000 + 720,000}{2} = \frac{1,390,000}{2} = 695,000 \]
Step 2: Calculate Fixed Asset Turnover Ratio
For 20Y4:
- Sales (20Y4) = $1,125,000
\[ \text{Fixed Asset Turnover Ratio (20Y4)} = \frac{1,125,000}{625,000} \approx 1.8 \]
For 20Y5:
- Sales (20Y5) = $1,668,000
\[ \text{Fixed Asset Turnover Ratio (20Y5)} = \frac{1,668,000}{695,000} \approx 2.4 \]
Summary of Fixed Asset Turnover Ratio:
- Fixed Asset Turnover Ratio (20Y4) = 1.8
- Fixed Asset Turnover Ratio (20Y5) = 2.4
Part b: Analyzing the Change in Fixed Asset Turnover Ratio
To determine whether the change in the ratio from 20Y4 to 20Y5 is favorable or unfavorable:
- 20Y4 Ratio: 1.8
- 20Y5 Ratio: 2.4
Since the Fixed Asset Turnover Ratio increased from 1.8 to 2.4, this indicates that the company is generating more sales per dollar of fixed assets in 20Y5 compared to 20Y4.
Conclusion: The change from 20Y4 to 20Y5 represents a favorable change in the Fixed Asset Turnover Ratio.
1 answer