restructuring charge (Fixed asset turnover higher lower on next year) only, net, recognized, employees, following

SWASH

From Schwser qbank:
The following footnote appeared in Crabtree Company’s 20X7 annual report:
“On December 31, 20X7, Crabtree recognized a restructuring charge of $20 million, of which $5 million was for severance pay for employees who will be terminated in 20X8 and $15 million was for land that became permanently impaired in 20X7.”
Based only on these changes, Crabtree’s net profit margin and fixed asset turnover ratio in 20X8 as compared to 20X7 will be?


Net profit margin Fixed asset turnover
A)
Higher Higher

B)
Lower Higher

C)
Higher Unchanged


The correct answer is C)


The restructuring charge and asset write-down are non-recurring transactions; thus, net income will be higher in 20X8, all else equal. In 20X8, fixed asset turnover will be the same as 20X7, all else equal. The asset impairment charge is a one-time charge, so fixed assets will not be reduced further in 20X8.

My question is Why we can not say that fixed aaset turnover will be higher? (due to less fixed asset in denominator, and most likely higher net income in numerator in year 2008; we will not have those costs in year 2008). Is my interperation right?

pogo

asset turnover numerator is sales, and the asset is impaired and written down for 20x7 which means it will be the same in 20x8 (assuming it isn't impaired again). hence assuming sales is unchanged the asset turnover is the same.

disiz64

If it were average assets it would be higher.