Sales 3,000,000 Net operating income 150,000 Average operating assets 750,000 Co

Question

Sales 3,000,000
Net operating income 150,000
Average operating assets 750,000

Consider each question independently. Carry out all computations to two decimal places.
1. Compute the companys return on investment (ROI)
2. The enterpreneur who founded the company is convinced that sales will increase next year by 50% and that net operating income will increase by 200% with no increase in average operating assets. What would be the companys ROI?
3. The cheif officer of the company believes a more realistic scenario would be a 1,000,000 increase in sales, requiring a 250,000 increase in average operating assets with a resulting 200,000 increase in net operating income. What would be the companys ROI in this scenario?

Explanation / Answer

1. Margin= net operating income/ sales = 150,000/3000000 = 5% Turnover= sales/ average operating assets = 3,000,000/750,000 = 4.0 So ROI= margin x turnover =5%*4 = 20% ...................Ans (1) 2. Sales = 1.5*3M = 4.5M Net OI = 2*150,000 = 300,000 Margin= net operating income/ sales = 300,000/4,500,000 = 6.67% Turnover= sales/ average operating assets = 4,500,000/750,000 = 6.0 So ROI= margin x turnover =6.67%*6 = 40% ...................Ans (2) 3. Sales = 3M+1M = 4M Net OI = 150,000+200,000 = 350,000 Avge OA = 750,000+250,000 = 1M Margin= net operating income/ sales = 350,000/4,000,000 = 8.75% Turnover= sales/ average operating assets = 4,000,000/1,000,000 = 4.0 So ROI= margin x turnover =8.75%*4 = 35% ...................Ans (3)

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