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Exercise 12-12 (30 minutes)
1.
Net operating income
Margin = Sales
$16,000
= = 2%
$800,000
Sales
Turnover = Average operating assets
$800,000
= = 8
$100,000
ROI = Margin × Turnover
= 2% × 8 = 16%
Problem 12-15 (30 minutes)
1. Breaking the ROI computation into two separate elements helps the
manager to see important relationships that might remain hidden. First,
the importance of turnover of assets as a key element to overall
profitability is emphasized. Prior to use of the ROI formula, managers
company may shave its margins slightly hoping for a large enough
increase in turnover to increase the overall rate of return. Fourth, it
permits a manager to reduce important profitability elements to ratio
form, which enhances comparisons between units (divisions, etc.) of the
organization.
2.
Companies in the Same Industry
A
B
C
Sales ..................................
$4,000,000
*
$1,500,000
*
$6,000,000
Net operating income ..........
$560,000
*
$210,000
*
$210,000
Average operating assets .....
$2,000,000
*
$3,000,000
$3,000,000
*
Margin ................................
14%
14%
3.5%
*
Turnover .............................
2.0
0.5
2.0
*
Return on investment (ROI) .
28%
7%
*
7%
*Given.
NAA Report No. 35
states (p. 35):
supports two dollars in sales each period, a dollar investment in
Company B supports only 50 cents in sales each period. This suggests
that the analyst should look carefully at Company B’s investment. Is the
company keeping an inventory larger than necessary for its sales
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