Question

Ann Productions calculated ROI as 9%. Sales now is $500,000 and the amount of Total Operating Assets is $450,000.

Calculate:

1. If the expenses are reduced by $ 50,000 and sales remains unchanged, what will be the ROI?

If both sales and expenses cannot be changed, what change in the amount of operating assets is required to achieve the same result?

Answer 1

Answer a)

Calculation of revised Return on Income

Return of Income = Net Profit/ Total operating assets

If expenses are reduced by $ 50,000, Net profit will increase by $ 50,000 and the ROI will be

                                = ($ 40,500 + $ 50,000)/ $ 450,000

                               = 20.11%

Therefore if the expenses are reduced by $ 50,000, the ROI will be 20.11%.

Working Note:

Calculation of Net profit

Return of Income = Net Profit/ Total operating assets

Net profit = Total operating assets X Return on Income

                  = $ 450,000 X 9%

                  = $ 40,500

Therefore present net profit of the company is $ 40,500.  

Answer b)

Calculation of amount of operating assets to achieve ROI of 20.11%

Return of Income = Net Profit/ Total operating assets

                   20.11% = $ 40,500/Total operating assets

Total operating assets = $ 40,500/ 20.11%

                                        = $ 201,392 (approximately)

Therefore total operating assets to achieve ROI of 22.11% is $ 201,392