PE 10-9B Fixed asset turnover ratio

Financial statement data for years ending December 31 for Fallon Company are shown below.

                                                                                       2012               2011
Net sales                                                                   $740,000         $520,000
Fixed assets:
Beginning of year                                                      425,000            375,000
End of year                                                                500,000            425,000

a. Determine the fixed asset turnover ratio for 2012 and 2011.

b. Does the change in the fixed asset turnover ratio from 2011 to 2012 indicate a favorable or an unfavorable trend?

Answer:
a. Fixed Asset Turnover:  
                                                             2012                 2011  
Revenue................................           $740,000           $520,000
Fixed assets:  
Beginning of year...........                 $425,000            $375,000  
End of year......................                $500,000            $425,000
Average fixed assets...........             $462,500            $400,000
                                [($425,000 + $500,000) ÷ 2] [($375,000 + $425,000) ÷ 2]
Fixed asset turnover ...........                 1.6                     1.3
                                            ($740,000 ÷ $462,500) ($520,000 ÷ $400,000)

b. The increase in the fixed asset turnover ratio from 1.3 to 1.6 indicates a favorable trend in the efficiency of using fixed assets to generate sales. 

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