Question

Yummy's is a restaurant chain operating in select cities in the Carolinas. Select financial data is presented below to provide you with the necessary content for performance evaluation purposes.

	Charlotte	Greenville	Columbia
	Restaurant	Restaurant	Restaurant	Total
Sales revenue	3,185,000	1,400,000	1,200,000	5,785,000
Variable costs	995,000	375,000	310,000	1,680,000
Fixed costs	1,680,000	725,000	650,000	3,055,000
Operating income	510,000	300,000	240,000	1,050,000
Interest costs on long-term debt at 10%				450,000
Income before income taxes				600,000
Income taxes at 30%				180,000
Net income				420,000
Net book values at the end of 2016:
Current assets	660,000	500,000	400,000	1,560,000
Long-term assets	2,340,000	1,500,000	600,000	4,440,000
Total assets	3,000,000	2,000,000	1,000,000	6,000,000
Current liabilities	300,000	150,000	50,000	500,000
Long-term debt				4,500,000
Stockholders' equity				1,000,000
Total liabilities and stockholders' equity				6,000,000

1. Calculate ROI for each of the three restaurants by using the condensed ROI formula.

2. Calculate Profit Margin (Return on Sales) for each.

3. Calculate Asset Turnover for each

4. Calculate ROI for each of the three again, but assume assets decrease by 200,000 for each one.

5. Calculate ROI for each of the three again, but assume sales increase by 10% for each one.

6. Calculate ROI for each of the three again, but assume fixed costs decrease by 5% for each one.

7. You should look at each of these three types of adjustments (reduce assets, increase sales and decrease fixed costs) and discuss the preferred approach from a strategic perspective for the Charlotte restaurant. Your explanation should consider factors extending beyond the ROI results. For example, do you see any disadvantages from each type of adjustment?

Answer 1

1	ROI=Operating income/Total assets
				Charlotte	Greenville	Columbia
	Operating income		a	510000	300000	240000
	Total assets		b	3000000	2000000	1000000
	ROI		a/b	17.00%	15.00%	24.00%
2	Profit margin=Operating income/Sales revenue
				Charlotte	Greenville	Columbia
	Operating income		a	510000	300000	240000
	Sales revenue		b	3185000	1400000	1200000
	Profit margin		a/b	16.01%	21.43%	20.00%
3	Asset turnover ratio=Sales revenue/Average total assets
	Due to lack of information, consider Average total assets=Total assets
				Charlotte	Greenville	Columbia
	Sales revenue		a	3185000	1400000	1200000
	Total assets		b	3000000	2000000	1000000
	Asset turnover ratio		a/b	1.06	0.70	1.20
4	Assets decrease by 200,000
				Charlotte	Greenville	Columbia
	Operating income		a	510000	300000	240000
	Total assets		b	2800000	1800000	800000
				(3000000-200000)	(2000000-200000)	(1000000-200000)
	ROI		a/b	18.21%	16.67%	30.00%
5	sales increase by 10%.This will increase the variable cost by 10%.
				Charlotte	Greenville	Columbia
	Sales revenue			3503500	1540000	1320000
				(3185000*110%)	(1400000*110%)	(1200000*110%)
	Less:
	Variable cost			1094500	412500	341000
				(995000*110%)	(375000*110%)	(310000*110%)
	Fixed costs			1680000	725000	650000
	Operating income		a	729000	402500	329000
	Total assets		b	3000000	2000000	1000000
	ROI		a/b	24.30%	20.13%	32.90%
6	fixed costs decrease by 5%
				Charlotte	Greenville	Columbia
	Sales revenue			3185000	1400000	1200000
	Less:
	Variable cost			995000	375000	310000
	Fixed costs			1596000	688750	617500
				(1680000*95%)	(725000*95%)	(650000*95%)
	Operating income		a	594000	336250	272500
	Total assets		b	3000000	2000000	1000000
	ROI		a/b	19.80%	16.81%	27.25%