[The following information applies to the questions displayed below.] Fitness Fa
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[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 $ 740,000 Net operating income $ 14,060 Average operating assets $ 100,000 References Section BreakExercise 11-11 Effects of Changes in Profits and Assets on Return on Investment (ROI) [LO11-1] 2.value: 10.00 pointsRequired information Exercise 11-11 Part 1 Required: 1. Compute the Springfield club’s return on investment (ROI). (Round your percentage answers to 2 decimal places (i.e., 0.1234 should be considered as 12.34%.)) rev: 08_01_2016_QC_CS-56541 ReferenceseBook & Resources WorksheetDifficulty: 2 Medium Exercise 11-11 Part 1Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI. Check my work 3.value: 10.00 pointsRequired information Exercise 11-11 Part 2 2. Assume that the manager of the club is able to increase sales by $74,000 and that, as a result, net operating income increases by $5,476. Further assume that this is possible without any increase in operating assets. What would be the club’s return on investment (ROI)? (Round your percentage answers to 2 decimal places (i.e., 0.1234 should be considered as 12.34%.)) ReferenceseBook & Resources WorksheetDifficulty: 2 Medium Exercise 11-11 Part 2Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI. Check my work 4.value: 10.00 pointsRequired information Exercise 11-11 Part 3 3. Assume that the manager of the club is able to reduce expenses by $2,960 without any change in sales or operating assets. What would be the club’s return on investment (ROI)? (Round your percentage answers to 2 decimal places (i.e., 0.1234 should be considered as 12.34%.)) ReferenceseBook & Resources WorksheetDifficulty: 2 Medium Exercise 11-11 Part 3Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI. Check my work 5.value: 10.00 pointsRequired information Exercise 11-11 Part 4 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 percentage answers to 2 decimal places (i.e., 0.1234 should be considered as 12.34%.)) ReferenceseBook & Resources WorksheetDifficulty: 2 Medium Exercise 11-11 Part 4Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI. Check my work ©2018 McGraw-Hill Education. All rights reserved.
Explanation / Answer
Ans 1
Calcualation of 's Springfield Club Return on Investment
Return on Investment = Margin * Turnover
Where.
Margin = Net Operating Income / Sales
=( $ 14,060 / $ 740,000 ) * 100
= 1.90 %
Asset Turnover = Sales / Average Operating Assets
= $ 740,000 / $ 100,000
= 7.4 times
Return on Investment = 1.9 * 7.4
= 14.06 %
Ans 2
If the sales are increased by $ 74,000 then
Revised Sales = $ 740000 + $ 74,000 = $ 814,000
and as a result Net Operating Income increases by $ 5,476 then the
Revised Net Operating Income = $ 14,060 + $ 5,476 = $ 19,536
Since there is no change in Opereating Assets
Operating Assets = $ 100000
We have to calculate revised Return on Investment
Revised Margin = 19,536 / 814,000 * 100
= 2.40%
Revised Net Operating Income = $ 814,000 /100,000
= $ 8.14 times
Revised Return on Investment(ROI) = 2.4 * 8.14
= 19.54 %
Note ; ROI basically indicates how effectively a company uses each dollar that is invested in assets to generate profits. There are basically two component of Return on Investment that is Margin and Asset Turnover. Here the Return on Investment has increased from 14.06 % to 19.54 % due to the fact that its Margin and Asset Turnover both has gone up without applying any additional operating assets.As sales and net operating income is increased considerably, the cumulative effect of the same could be observed in higher Return on Invesment.
Ans 3
If the Maneger of the Club is able to reduce the expense by $ 2, 960 without any change in Sales and average asssets which means that our Net Operating Income would increased by $ 2,960
Hence the Revised Net Operating Income = $ 14,060 + $ 2960 = $ 17,020
Revised Margin = $ 17,020 / $ 740,000 *100
= 2.30 %
Net Operating Income = $ 740,000 / $ 100,000
= 7.4 times
Revised Return of Investment = 2.3 * 7.4
= 17.02 %
Note : Here Return on Investment has increased moderatly from 14.06 % to 17.02 %. Reason being the reduction in the expense has increased our Net Operating Income, due to which Margin has increased by 0.5 % pushing ROI to increase. Here increase in ROI is only because of increase in margin as there is no change in Asset Turnover.
Ans 4
If the manager is able to reduce the Operating Assets by $ 20,000 without any change in Sales and Net Operating Income, then
Revised Average Operating Assets = $ 100,000 - $ 20,000
= $ 80,000
Margin = 1.90 % ( Margin would not change as there is no change in Sales and Net Operating Income)
Revised Asset Turnover = $ 740,000 / $ 80,000
= 9.25 times
Revised Return on Investment (ROI) = 1.90 * 9.25
= 17.58 %
Note: Here also Return on Investment has gone up by 3.52 %. Reason being higher Asset Turnover Ratio as there is reduction in application of operating asset, hence lesser amount of capital being blocked in working capital. Here Higher ROI is only due to increased Asset Turnover ratio as there is no change in the Margin.
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