Question

Problem 10-17 Comparison of Performance Using Return on Investment (ROI) [LO10-1]

Comparative data on three companies in the same service industry are given below:

Required:

2. Fill in the missing information.

	Company A B C Sales $4,554,000 $1,435,000 Net operating income $637,560 $186,550 Average operating assets $2,070,000 $3,080,000 Margin % % 7 % Turnover 1.90 Return on investment (ROI) % 6.50 % %

Answer 1

Particular	A	B	C
(a) sales	$4554000	$1435000	$5852000 (Note 9 below)
b)net operating income	$637560	$186550	$409640 (Note 8 below)
c)average operating assets	$2070000	$2870000 (Note 6 below)	$3080000
d) margin	14% (Note 1 below)	13% (Note 4 below)	7%
e) turnover	2.2 (Note 2 below)	0.5 ( Note 5 below)	1.90
f) return on investment	30.8% (Note 3 below)	6.50%	13.3% (Note 7 below)

Note 1 = margin = net operating income/sales×100

= $637560/$4554000×100= 14%

Note 2 = turnover = sales/average operating assets

= $4554000/$2070000 = 2.2

Note 3 return on investment = margin ×turnover

= 14× 2.2 = 30.8%

Note 4 = Margin of B = $186550/$1435000×100 = 13%

Note 5 =turnover = return on investment/margin

= 6.50/13 = 0.5

Note 6 = average operating assets = sales/turnover

=$1435000/0.5 = $2870000

Note 7 = return on investment = margin × turnover

= 7×1.90 = 13.3%

Note 8 = net operating income = average operating assets × return on investment

= $3080000×13.3% = $409640

Note 9 = sales = net operating income ×1/Margin

= $409640×100/7= $5852000

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