Question

Problem One
Yummy's is a restaurant chain operating in select cities in the Carolinas. Select financial data is presented
below to provide you with the necessary content for perfromance evaluation purposes.
	Charlotte	Greenville	Columbia
	Restaurant	Restaurant	Restaurant	Total
Sales revenue	3,185,000	1,400,000	1,200,000	5,785,000
Variable costs	995,000	375,000	310,000	1,680,000
Fixed costs	1,680,000	725,000	650,000	3,055,000
Operating income	510,000	300,000	240,000	1,050,000
Interest costs on long-term debt at 10%				450,000
Income before income taxes				600,000
Income taxes at 30%				180,000
Net income				420,000
Net book values at the end of 2016:
Current assets	660,000	500,000	400,000	1,560,000
Long-term assets	2,340,000	1,500,000	600,000	4,440,000
Total assets	3,000,000	2,000,000	1,000,000	6,000,000
Current liabilities	300,000	150,000	50,000	500,000
Long-term debt				4,500,000
Stockholders' equity				1,000,000
Total liabilities and stockholders' equity				6,000,000
Requirement One:
Calculate ROI for each of the three
restaurants by using the DuPont method
Requirement Two:
Calculate ROI for each of the three again, but
assume assets decrease by 200,000 for each one.
Sales and costs remain the same as presented.
Requirement Three:
Calculate ROI for each of the three again, but
assume sales increase by 10% for each one.
Assets and fixed costs remain the same as presented.
Requirement Four:
Calculate ROI for each of the three again, but
assume fixed costs decrease by 5% for each one.
Assets and costs remain the same as presented.
Requirement Five:
You should look at each of these three types of adjustments (reduce assets, increase sales and decrease fixed costs)
and discuss the preferred approach from a strategic perspective. Your explanation should extend beyond the impact the
adjustment has on ROI. For example, do you see any disadvantages from each type of adjustment?

Answer 1

Return on Investment or Return on Capital Employed can be computed by comparing the Earnings before Interest and Taxes (EBIT) and Capital Employed. The formula for computing ROI is as follows:

In DuPont analysis, Return on Investment is computed by the product of Net Operating Profit ratio and Capital Turnover ratio. Net Operating Profit ratio is computed by dividing Earnings before Interest and Taxes (EBIT) with Net Sales. Capital turnover ratio is computed by dividing Net Sales with Capital Employed.

Where, EBIT = Sales - Cost of Goods Sold - Office & Admin Expenses - Selling & Distribution Expenses.

Capital employed = Long Term debt + Stockholder's Equity.

Solution to Requirement 1

Particulars	Charlotte	Greenville	Columbia	Total
Sales	3,185,000	1,400,000	1,200,000	5,785,000
Less: Variable Costs	(995,000)	(375,000)	(310,000)	(1,680,000)
Contribution	2,190,000	1,025,000	890,000	4,105,000
Less: Fixed Costs	(1,680,000)	(725,000)	(650,000)	(3,055,000)
EBIT	510,000	300,000	240,000	1,050,000
Long Term debt (A)				4,500,000
Stockholder's Equity (B)				1,000,000
Capital Employed (A)+(B)				5,500,000
Net Operating Profit Ratio
(C)	16.01%	21.43%	20%	18.15%
Capital Turnover Ratio
(D)	58%	25.5%	22%
ROI = (C)x(D)	9.3%	5.5%	4.4%