Question

Fitness Fanatics is a regional chain of health clubs. The managers of the clubs, who have authority to make investments as needed, are evaluated based largely on return on investment (ROI). The company's Springfield Club reported the following results for the past year:

Sales	$	840,000
Net operating income	$	24,360
Average operating assets	$	100,000
Required: 1. Compute the Springfield club’s return on investment (ROI). (Round your Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Margin: Turnover: ROI: 2. Assume that the manager of the club is able to increase sales by $84,000 and that, as a result, net operating income increases by $7,056. Further assume that this is possible without any increase in operating assets. What would be the club’s return on investment (ROI)? (Round your Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Margin: Turnover: ROI:       3. Assume that the manager of the club is able to reduce expenses by $3,360 without any change in sales or operating assets. What would be the club’s return on investment (ROI)? (Round your Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Margin: Turnover: ROI:       4. Assume that the manager of the club is able to reduce operating assets by $20,000 without any change in sales or net operating income. What would be the club’s return on investment (ROI)? (Round your Turnover answer to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Margin: Turnover: ROI:

Answer 1

Solution:

Part 1 –

Margin
Net Operating Income	$24,360
Sales	$840,000
Profit Margin (Net Income / Sales*100)	2.90%
Turnover
Sales	$840,000
Average Operating assets	$100,000
Turnover (Sales / Avg Operating Assets)	8.40
ROI
Margin	2.90%
x Turnover	8.40
ROI	24.36%

Part 2 --

Margin
Net Operating Income (24,360 + Increase 7,056)	$31,416
Sales ($840,000 + Increase $84,000)	$924,000
Profit Margin (Net Income / Sales*100)	3.40%
Turnover
Sales ($840,000 + Increase $84,000)	$924,000
Average Operating assets	$100,000
Turnover (Sales / Avg Operating Assets)	9.24
ROI
Margin	3.40%
x Turnover	9.24
ROI	31.42%

Part 3 ---

Margin
Net Operating Income (24,360 + Reduction in Expense 3360)	$27,720
Sales	$840,000
Profit Margin (Net Income / Sales*100)	3.30%
Turnover
Sales	$840,000
Average Operating assets	$100,000
Turnover (Sales / Avg Operating Assets)	8.40
ROI
Margin	3.30%
x Turnover	8.40
ROI	27.72%

Part 4 ---

Margin
Net Operating Income	$24,360
Sales	$840,000
Profit Margin (Net Income / Sales*100)	2.90%
Turnover
Sales	$840,000
Average Operating assets ($100,000 - Reduce 20,000)	$80,000
Turnover (Sales / Avg Operating Assets)	10.50
ROI
Margin	2.90%
x Turnover	10.50
ROI	30.45%

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