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 $1,400,000
Net operating income $70,000
Average operating assets $350,000

Required:
a. Compute the Springfield club's return on investment (ROI), margin and turnover value.
b. Assume that the manager of the club is able to increase sales by $70,000 and that, as a result, net operating income increases by $18,200. Further, assume that this is possible without any increase in operating assets. What would be the club's return on investment (ROI), margin and turnover value?
c. Assume that the manager of the club is able to reduce expenses by $14,000 without any change in sales or operating assets. What would be the club's return on investment (ROI), margin and turnover value?

Answer 1

1. 20%

2.25.2%

3.24%

Step-by-step explanation:

1. Calculation to determine the ROI

Using this formula

ROI= Net income/Average operating assets

Let plug in the formula

ROI= $70,000 / $350,000*100

ROI= 20%

2) ROI = ($70,000 +$18,200)/$350000"100

ROI=$88,200/$350,000*100

ROI=25.2%

3) ROI = ($70,000 +$14,000)/350000*100

ROI=$84,000/$350,000*100

ROI=24%