CommercialServices.com Corporation provides business-to-business services on the Internet.

CommercialServices.com Corporation provides business-to-business services on the Internet. Data concerning the most recent year appear below:

 

Sales	$8,400,000
Net operating income	$800,000
Average operating assets	$3,200,000

   

Consider each of the following requirements independently.

 

Requirement 1:

Compute the company's return on investment (ROI). (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

 

Return on investment (ROI)

%

 

Requirement 2:

The entrepreneur who founded the company is convinced that sales will increase next year by 40% and that net operating income will increase by 160%, with no increase in average operating assets. What would be the company's ROI? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Return on investment (ROI)

%

 

Requirement 3:

The chief financial officer of the company believes a more realistic scenario would be a $1,900,000 increase in sales, requiring a $800,000 increase in average operating assets, with a resulting $330,000 increase in net operating income. What would be the company's ROI in this scenario? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

   

Return on investment (ROI)

%

rev: 05_03_2012, 05_16_2012

Explanation:

1:

Margin =	Net Operating income
	Sales
=	$800,000	= 9.524%
	$8,400,000

   

Turnover =	Sales
	Average operating assets
=	$8,400,000	= 2.625
	$3,200,000

 

ROI	= Margin × Turnover
	= 9.524% × 2.625 = 25%

 
2:

Margin =	Net Operating income
	Sales
=	$800,000(1.00+1.6)
	$8,400,000(1.00+0.4)
=	$2,080,000	= 17.687%
	$11,760,000

    

Turnover =	Sales
	Average operating assets
=	$8,400,000(1.00+0.4)
	$3,200,000
=	$11,760,000	= 3.675
	$3,200,000

 

ROI	= Margin × Turnover
	= 17.687% × 3.675 = 65%

 
3:

Margin  =	Net Operating income
	Sales
=	$800,000+$330,000
	$8,400,000+$1,900,000
=	$1,130,000	= 10.971%
	$10,300,000

    

Turnover =	Sales
	Average operating assets
=	$8,400,000+$1,900,000
	$3,200,000+$800,000
=	$10,300,000	= 2.575
	$4,000,000

  

ROI	= Margin × Turnover
	= 10.971% × 2.575 = 28.25%

Pecs Alley is a regional chain of health clubs. The managers of the clubs, who have authority to make

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.)

 

Return on investment

%

 

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.)

 

Return on Investment

%

 

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.)

 

Return on investment

%

 

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.)

 

Return on investment

%

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%

Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $11,500,000 $13,500,000 $24,500,000 Average operating assets $2,875,000 $5,400,000 $4,375,000 Net operating income $517,500 $472,500 $661,500 Minimum required rate of return 14% 12% 14%

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

 

	Division A	Division B	Division C
Sales	$11,500,000	$13,500,000	$24,500,000
Average operating assets	$2,875,000	$5,400,000	$4,375,000
Net operating income	$517,500	$472,500	$661,500
Minimum required rate of return	14%	12%	14%

	Division A	Division B	Division C
Average operating assets	$2,875,000	$5,400,000	$4,375,000
Required rate of return	×14%	×12%	×14%
Minimum required return	$402,500	$648,000	$612,500
Actual net operating income	$517,500	$472,500	$661,500
Minimum required return (above)	18	648,000	612,500
Residual income	$115,000	$(175,500)	$49,000

Juniper Design Ltd. of Manchester, England, is a company specializing in providing design services to

Juniper Design Ltd. of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of £410,000 on sales of £1,400,000. The company's average operating assets for the year were £1,600,000 and its minimum required rate of return was 11%. (The currency used in England is the pound, denoted by £.)

Required:

Compute the company's residual income for the year. (Omit the "£" sign in your response.)

 

Residual income

£

Explanation:

Average operating assets	£1,600,000
Net operating income	£410,000
Minimum required return: 11% × £ 1,600,000	176,000
Residual income	£234,000