____1. For a recent operating period, the Bayside Division of Fairhaven Corporat

Question

____1. For a recent operating period, the Bayside Division of Fairhaven Corporation had sales of $400,000, net operating income of $30,000 (cost of goods sold is $250,000 and operating expenses are $120,000), and average operating assets of $320,000. Several Bayside managers have developed a plan to reduce operating expenses by 10%. What is the impact of this proposed reduction on margin, turnover, and ROI?

a. Margin will remain the same, turnover will increase, and ROI will increase.

b. Margin will increase, turnover will remain the same, and ROI will increase.

c. Margin will decrease, turnover will increase, and ROI will decrease.

d. Margin will decrease, turnover will decrease, and ROI will decrease.

Explanation / Answer

b. Margin will increase, turnover will remain the same, and ROI will increase. Turnover is sales which is 400,000 Margin is Sales - (COGS + Op exp) = 400,000-(250,000+0.9*120000) = $42,000. This has increase from earlier 30000. ROI = net operating income/average operating assets = 42000/320000 = 13.13%

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