Question

Exercise 10-11 Effects of Changes in Profits and Assets on Return on Investment (ROI) [LO10-1]

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Fitness Fanatics 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 company's Springfield Club reported the following results for the past year:

Sales	$	1,400,000
Net operating income	$	70,000
Average operating assets	$	350,000

1. Compute the Springfield club’s return on investment (ROI).

2. Assume that the manager of the club is able to increase sales by $70,000 and that, as a result, net operating income increases by $18,200. Further assume that this is possible without any increase in average operating assets. What would be the club’s return on investment (ROI)? (Do not round intermediate calculations. Round your answer to 1 decimal place.)

3. Assume that the manager of the club is able to reduce expenses by $14,000 without any change in sales or average operating assets. What would be the club’s return on investment (ROI)?

4. Assume that the manager of the club is able to reduce average operating assets by $70,000 without any change in sales or net operating income. What would be the club’s return on investment (ROI)?

Answer 1

Answer:

1)

Return on investment (ROI )                = Net operating income / Average operating assets                =    $ 70,000 / $ 350,000                =     20%

Springfield club’s return on investment (ROI) = 20%

2)

Return on investment (ROI )                = New Net operating income / Average operating assets                =    ($ 70,000 + $ 18,200 ) / $ 350,000                =    $ 88,200 / $ 350,000                =     25.20%

club’s return on investment (ROI)   = 25.20%

3)

Return on investment (ROI )                = New Net operating income / Average operating assets                =    ($ 70,000 + $ 14,000 ) / $ 350,000                =    $ 84,000 / $ 350,000                =     24 %

Club’s return on investment (ROI)   = 24 %

4)

Return on investment (ROI )                = Net operating income / New Average operating assets                =    $ 70,000 / ($ 350,000 (-) $ 70,000)                 =    $ 70,000 / $ 280,000                =     25%

Club’s return on investment (ROI)   = 25 %