Pecs
Alley is a regional chain of health clubs. The managers of the clubs,
who have authority to make investments as needed, are evaluated based
largely on return on investment (ROI). The Springfield Club reported the
following results for the past year:
| |
| Sales | $890,000 |
| Net operating income | $18,000 |
| Average operating assets | $98,000 |
|
The following questions are to be considered independently. Carry out all computations to two decimal places.
|
| Requirement 1: |
Compute the club's return on investment (ROI). (Round
interim calculations to 2 decimal places. Round your answer to the
nearest whole percentage. Omit the "%" sign in your response.)
|
| Requirement 2: |
Assume
that the manager of the club is able to increase sales by $76,000 and
that, as a result, net operating income increases by $6,000. Further
assume that this is possible without any increase in operating assets.
What would be the club’s return on investment (ROI)? (Round interim calculations to 2 decimal places. Round your answer to the nearest whole percentage.Omit the "%" sign in your response.)
|
| Requirement 3: |
Assume
that the manager of the club is able to reduce expenses by $2,800
without any change in sales or operating assets. What would be the
club’s return on investment (ROI)? (Round
interim calculations to 2 decimal places. Round your answer to the
nearest whole percentage. Omit the "%" sign in your response.)
|
| Requirement 4: |
Assume
that the manager of the club is able to reduce operating assets by
$21,000 without any change in sales or net operating income. What would
be the club’s return on investment (ROI)? (Round
interim calculations to 2 decimal places. Round your answer to the
nearest whole percentage. Omit the "%" sign in your response.)
|
Explanation:
1:
| Margin = |
Net Operating income
|
| Sales |
| | |
| = |
$18,000
| = 2.02% |
| $890,000 |
| Turnover = |
Sales
|
| Average operating assets |
| | |
| = |
$890,000
| = 9.08 |
| $98,000 |
| ROI | = Margin × Turnover |
| = 2.02% × 9.08 = 18% |
2:
| Margin = |
Net Operating income
|
| Sales |
| | |
| = |
$18,000+$6,000
| |
| $890,000+$76,000 |
|
| |
| = |
$24,000
| = 2.48% |
| $966,000 |
| Turnover = |
Sales
|
| Average operating assets |
| | |
| = |
$890,000+$76,000
|
| $98,000 |
|
| = |
$966,000
| = 9.86 |
| $98,000 |
| ROI | = Margin × Turnover |
| = 2.48% × 9.86 = 24% |
3:
| Margin = |
Net Operating income
|
| Sales |
| | |
| = |
$18,000+$2,800
|
| $890,000 |
|
| = |
$20,800
| = 2.34% |
| $890,000 |
| Turnover = |
Sales
|
| Average operating assets |
| | |
| = |
$890,000
| = 9.08 |
| $98,000 |
| ROI | = Margin × Turnover |
| = 2.34% × 9.08 = 21% |
4:
| Margin = |
Net Operating income
|
| Sales |
| | |
| = |
$18,000
| = 2.02% |
| $890,000 |
| Turnover = |
Sales
|
| Average operating assets |
| | |
| = |
$890,000
|
| $98,000 – $21,000 |
|
| = |
$890,000
| = 11.56 |
| $77,000 |
| ROI | = Margin × Turnover |
| = 2.02% × 11.56 = 23% |
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