Nywening Ltd. (Nywening) operates in a highly competitive industry. Price is very important to most customers and it’s very difficult for small operators such as Nywening to differentiate themselves on product quality.

It’s possible to differentiate based on service, but most competitors offer reasonably comparable service packages. The president of Nywening is reviewing the company’s performance in 2014. During 2014, sales increased by 12 percent to $3,500,000.

Average total assets for the year were $1,950,000, net income was $200,000, and interest expense was $60,000. Nywening’s tax rate is 20 percent.

The president believes that Nywening can improve its performance in 2015. She would like to see a 15 percent growth in sales in 2015 and a return on assets of 20 percent.

The president estimates that it will be necessary to increase assets by 10 percent in 2015. The president doesn’t think that any additional borrowing will be required and, as a result, the interest expense for 2015 will be the same as for 2014. The tax rate is expected to stay the same.

Required:

a. Calculate Nywening’s profit margin, asset turnover, and return on assets for 2014.

b. What asset turnover ratio in 2015 will achieve the president’s objectives? What net income is needed? What would the profit margin be if the objectives are achieved?
For purposes of this question use net income plus the after tax cost of interest to calculate profit margin.

c. Do you think the president’s objectives are reasonable?