Financial statement data for years ending December 31 for DePuy Company follow:
Year 2 | Year 1
Sales $5,510,000 | $4,880,000
Fixed assets:
Beginning of year 1,600,000 | 1,450,000
End of year 2,200,000 | 1,600,000
a. Determine the fixed asset turnover ratio for Year 1 and Year 2.
b. Does the change in the fixed asset turnover ratio from Year 1 to Year 2 indicate a favorable or an unfavorable change?
Answer:
a. Fixed Asset Turnover: Sales.................................... Fixed assets: Beginning of year............... End of year........................ Average fixed assets............... Fixed asset turnover............... Year 2 Year 1 $5,510,000 $4,880,000 ($5,510,000 ÷ $1,900,000) ($4,880,000 ÷ $1,525,000) b. The decrease in the fixed asset turnover ratio from 3.2 to 2.9 indicates an unfavorable change in the efficiency of using fixed assets to generate sales.