Fitness Fanatics is a regional chain of health clubs. The managers of the clubs,
ID: 2531249 • Letter: F
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:
1. Assume that the manager of the club is able to increase sales by $72,000 and that, as a result, net operating income increases by $5,184. Further assume that this is possible without any increase in average operating assets. What would be the club’s return on investment (ROI)?
2.Assume that the manager of the club is able to reduce expenses by $2,880 without any change in sales or average operating assets. What would be the club’s return on investment (ROI)?
3.Assume that the manager of the club is able to reduce average operating assets by $20,000 without any change in sales or net operating income. What would be the club’s return on investment (ROI)?
Sales $ 720,000 Net operating income $ 12,240 Average operating assets $ 100,000Explanation / Answer
1) Increased Net Operating Income = $12,240+$5,184 = $17,424
Return on Investment = Net Operating Income/Average Operating Assets
= $17,424/$100,000 = 17.42%
2) Decrease in expenses by $2,880 will increase the net operating income by $2,880.
Increased Net Operating Income = $12,240+$2,880 = $15,120
Return on Investment = Net Operating Income/Average Operating Assets
= $15,120/$100,000 = 15.12%
3) New Average Operating Assets = $100,000 - $20,000 = $80,000
Return on Investment = Net Operating Income/Average Operating Assets
= $12,240/$80,000 = 15.30%
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