Question

Margin, Turnover, Return on Investment, Average Operating Assets

Elway Company provided the following income statement for the last year:

Sales	$859,290,000
Less: Variable expenses	540,984,000
Contribution margin	$318,306,000
Less: Fixed expenses	195,596,000
Operating income	$122,710,000

At the beginning of last year, Elway had $38,662,000 in operating assets. At the end of the year, Elway had $41,354,000 in operating assets.

Required:

1. Compute average operating assets.
$

2. Compute the margin (as a percent) and turnover ratios for last year. If required, round your answers to two decimal places.

Margin	%
Turnover

3. Compute ROI as a percent. Use the part 2 final answers in these calculations and round the final answer to two decimal places.
%

4. ROI measures a company’s ability to generate relative to its investment in assets. The greater the ROI, the efficiently the company is generating from its assets.

5. CONCEPTUAL CONNECTION Comment on why the ROI for Elway Company is relatively high (as compared to the lower ROI of a typical manufacturing company).

Elway Company might be a service organization with relatively few physical assets required to generate its sales revenue and income. ROI will be higher when the factors that create a company’s sales or income are not formally recognized as assets (e.g. human talent).

Elway Company might be a service organization with relatively few physical assets required and generates an income much higher than any manufacturing organization. ROI will be higher when the factors that create a company’s sales or income are not formally recognized as assets (e.g. human talent).

Elway Company might be a service organization with relatively few physical assets required and generates an income much higher than any manufacturing organization. ROI will be higher when the factors that create a company’s sales or income are not formally recognized as assets (e.g. goodwill).

Answer 1

Solution 1:

Average operating assets = (Beginning operating assets + Ending operating assets) / 2 = ($38,662,000 + $41,354,000) / 2 = $40,008,000

Solution 2:

Profit margin
Choose Numerator	/	Choose denomerator	=	Profit Margin
Details	Amount	Details	Amount
Operating Income	$122,710,000.00	/	Sales	$859,290,000.00	=	14.28%

Choose Numerator	/	Choose denomerator	=	Investment Turnover
Details	Amount	Details	Amount
Sales	$859,290,000.00	/	Average operating assets	$40,008,000.00	=	21.48

Solution 3:

Return on Investment - Expended Formula
Profit Margin	*	Investment Turnover	=	Return on Investment
14.28%	*	21.48	=	306.71%

Solution 4:

ROI measures a company’s ability to generate relative to its investment in assets. The greater the ROI, the efficiently the company is generating from its assets.

Solution 5:

Elway Company might be a service organization with relatively few physical assets required and generates an income much higher than any manufacturing organization. ROI will be higher when the factors that create a company’s sales or income are not formally recognized as assets (e.g. human talent).