Limitations of the Fixed Asset Turnover Ratio

Progressive Company reported the following asset values in 2014 and 2015:

In addition, in 2015, Progressive had sales of $4,800,000 ; cost of goods sold for the year was $2,900,000.

As of the end of 2014, the fair value of Progressives total assets was $3,000,000. Of the excess of fair value over book value, $100,000 resulted from the fact that Progressive uses LIFO for inventory valuation. As of the end of 2015, the fair value of Progressives total assets was $3,800,000, and Progressives LIFO reserve was $150,000.

Instructions:

1. Compute Progressives fixed asset turnover ratio for 2015.

2. Using the fair value of fixed assets instead of their book values, recompute Progressives fixed asset turnover ratio for 2015. State any assumptions that you make.

Answer

Check Figure: Fixed asset turnover = 2.01

3. Progressives primary competitor is Steady State. Steady States fixed asset turnover ratio for 2015, based on publicly available information, is 2.5. Is Progressive more or less efficient at using its fixed assets than Steady State? Explain your answer.

2015 2014 50,000 45,000 Cash Accounts receivable 300,000 220,000 Inventory 650,000 510,000 Land 600,000 400,000 Buildings 900,000 800,000 350,000 250,000 Equipment