Question

Exercise 11-13 Effects of Changes in Sales, Expenses, and Assets on ROI [LO11-1]

[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	$	3,900,000
Net operating income	$	273,000
Average operating assets	$	780,000

1. Compute the company's return on investment (ROI). (Do not round intermediate calculations. Round your answer to 2 decimal places.)

2. The entrepreneur who founded the company is convinced that sales will increase next year by 60% and that net operating income will increase by 100%, with no increase in average operating assets. What would be the company’s ROI? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

3. The Chief Financial Officer of the company believes a more realistic scenario would be a $1,150,000 increase in sales, requiring a $230,000 increase in average operating assets, with a resulting $105,750 increase in net operating income. What would be the company’s ROI in this scenario? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

1. Compute company’s Return on Investment(ROI)

Sales	$	3,900,000
Net Operating Income	$	273,000
Average Operating Assets	$	780,000

Return on Investment(ROI)= (Net Operating Income/ Average Operating Assets)*100

= (273,000/ 780,000)*100

= 35.00%

2. Compute company’s Return on Investment(ROI)

Increase in sales = 60%

Increase in Net Operating Income= 100%

	Amount($)	Change($)	Revised amount($)
	1	2	3=1+2
Sales	3,900,000	3,900,000*60%= 2,340,000	6,240,000
Net Operating Income	273,000	273,000*100%= 273,000	546,000
Average Operating Assets	780,000	NIL	780,000

Return on Investment(ROI)= (Net Operating Income/ Average Operating Assets)*100

= (546,000/ 780,000)*100

= 70.00%

3. Compute company’s Return on Investment(ROI)

Increase in sales = $1,150,000

Increase in Net Operating Income= $105,750

Increase in Average operating assets = $230,000

	Amount($)	Change($)	Revised amount($)
	1	2	3=1+2
Sales	3,900,000	1,150,000	5,050,000
Net Operating Income	273,000	105,750	378,750
Average Operating Assets	780,000	230,000	1,010,000

Return on Investment(ROI)= (Net Operating Income/ Average Operating Assets)*100

= (378,750/ 1,010,000)*100

= 37.50%