Question

Exercise 10-13 Effects of Changes in Sales, Expenses, and Assets on ROI [LO10-1]

[The following information applies to the questions displayed below.]

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

Sales	$	3,000,000
Net operating income	$	150,000
Average operating assets	$	750,000

1. Compute the company's return on investment (ROI).

2. The entrepreneur who founded the company is convinced that sales will increase next year by 50% and that net operating income will increase by 200%, with no increase in average operating assets. What would be the company’s ROI?

3. The Chief Financial Officer of the company believes a more realistic scenario would be a $1,000,000 increase in sales, requiring a $250,000 increase in average operating assets, with a resulting $200,000 increase in net operating income. What would be the company’s ROI in this scenario? (Do not round intermediate calculations.)

Answer 1

Answer:

1)

Return on investment (ROI )                = Net operating income / Average operating assets                =    $ 150,000 / $ 750,000                =     20%

Return on investment (ROI ) = 20%

2)

New Operating income = $ 150,000 + 200% = $ 450,000

Return on investment (ROI )                = Net operating income / Average operating assets                =    $ 450,000 / $ 750,000                =     60%

Return on investment (ROI ) = 60%

3)

New Average operating assets = $ 750,000 + $ 250,000 = $ 1,000,000

New Operating Income = $ 150,000 + $ 200,000 = $ 350,000

Return on investment (ROI )                = Net operating income / New Average operating assets                =    $ 350,000 / $ 1,000,000                =     35%

Return on investment (ROI ) = 35%