Question

Exercise 9-11 Effects of Changes in Profits and Assets on Return on Investment (ROI) [LO9-1] [The following information applies to the questions displayed below.] 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 $ 820,000 Net operating income $ 22,140 Average operating assets $ 100,000 References Section BreakExercise 9-11 Effects of Changes in Profits and Assets on Return on Investment (ROI) [LO9-1] 1.value: 3.00 pointsRequired information Exercise 9-11 Part 1 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).) rev: 08_01_2016_QC_CS-56541 ReferenceseBook & Resources WorksheetDifficulty: 2 Medium Exercise 9-11 Part 1Learning Objective: 09-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI. Ask your instructor a questionCheck my work 2.value: 3.00 pointsRequired information Exercise 9-11 Part 2 2. Assume that the manager of the club is able to increase sales by $82,000 and that, as a result, net operating income increases by $6,724. 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).) ReferenceseBook & Resources WorksheetDifficulty: 2 Medium Exercise 9-11 Part 2Learning Objective: 09-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI. Ask your instructor a questionCheck my work 3.value: 3.00 pointsRequired information Exercise 9-11 Part 3 3. Assume that the manager of the club is able to reduce expenses by $3,280 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).) ReferenceseBook & Resources WorksheetDifficulty: 2 Medium Exercise 9-11 Part 3Learning Objective: 09-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI. Ask your instructor a questionCheck my work 4.value: 3.00 pointsRequired information Exercise 9-11 Part 4 4. Assume that the manager of the club is able to reduce operating assets by $50,000 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).)

Answer 1

Answer a.

Margin = Net Operating Income / Sales
Margin = $22,140 / $820,000
Margin = 2.70%

Turnover = Sales / Average Operating Assets
Turnover = $820,000 / $100,000
Turnover = 8.20

ROI = Margin * Turnover
ROI = 2.70% * 8.20
ROI = 22.14%

Answer b.

Sales = $820,000 + $82,000 = $902,000
Net operating income = $22,140 + $6,724 = $28,864
Average operating assets = $100,000

Margin = Net Operating Income / Sales
Margin = $28,864 / $902,000
Margin = 3.20%

Turnover = Sales / Average Operating Assets
Turnover = $902,000 / $100,000
Turnover = 9.02

ROI = Margin * Turnover
ROI = 3.20% * 9.02
ROI = 28.86%

Answer c.

Sales = $820,000
Net operating income = $22,140 + $3,280 = $25,420
Average operating assets = $100,000

Margin = Net Operating Income / Sales
Margin = $25,420 / $820,000
Margin = 3.10%

Turnover = Sales / Average Operating Assets
Turnover = $820,000 / $100,000
Turnover = 8.20

ROI = Margin * Turnover
ROI = 3.10% * 8.20
ROI = 25.42%

Answer d.

Sales = $820,000
Net operating income = $22,140
Average operating assets = $100,000 - $50,000 = $50,000

Margin = Net Operating Income / Sales
Margin = $22,140 / $820,000
Margin = 2.70%

Turnover = Sales / Average Operating Assets
Turnover = $820,000 / $50,000
Turnover = 16.40

ROI = Margin * Turnover
ROI = 2.70% * 16.40
ROI = 44.28%