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	$	830,000
Net operating income	$	23,240
Average operating assets	$	100,000

The following questions are to be considered independently.

Exercise 11-11 Part 1

Required:

1. Compute the Springfield club’s return on investment (ROI)

2. Assume that the manager of the club is able to increase sales by $83,000 and that, as a result, net operating income increases by $6,889. Further assume that this is possible without any increase in 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 expenses by $3,320 without any change in sales or average operating assets. What would be the club’s return on investment (ROI)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

4. Assume that the manager of the club is able to reduce average operating assets by $50,000 without any change in sales or net operating income. What would be the club’s return on investment (ROI)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

1. ROI can be calculated by below formula

= Net Operating Income / Investments *100

=$ 23,240 / $ 1,00,000 *100

= 23.24 %

2.If the Sales and net operating income is increased without change in investment ROI would be as follows =

= Net Operating Income / Investments *100

=$ 30,129 / $ 1,00,000 *100

= 30.12%

3. If there is reduction in expenses it leads to increase in net profit ROI would be as follows =

= Net Operating Income / Investments *100

= $ 23,240 + $ 3320 / $ 1,00,00 *100

=26.56 %

4.If the average operating assets are reduced to $ 50,000

= Net Operating Income / Investments *100

= $ 23,240 / $ 50,000 *100

=46.48 %