Return on Investment, Margin, Turnover Ready Electronics is facing stiff competi

Question

Return on Investment, Margin, Turnover Ready Electronics is facing stiff competition from imported goods. Its operating income margin has been declining steadily for the past several years. The company has been forced to lower prices so that it can maintain its market share. The operating results for the past 3 years are as follows:

Year 1 Year 2 Year 3

Sales $12,500,000 $ 9,500,000 $ 9,000,000

Operating income 1,200,000 1,095,000 945,000

Average assets 15,000,000 15,000,000 17,250,000

For the coming year, Ready's president plans to install a JIT purchasing and manufacturing system. She estimates that inventories will be reduced by 70% during the first year of operations, producing a 20% reduction in the average operating assets of the company, which would remain unchanged without the JIT system. She also estimates that sales and operating income will be restored to Year 1 levels because of simultaneous reductions in operating expenses and selling prices. Lower selling prices will allow Ready to expand its market share. (Note: Round all numbers to two decimal places.)

Conceptual Connection: Suppose that the sales and net operating income for Year 4 remained the same as in Year 3 but inventory reductions were achieved as projected. Compute the ROI, margin, and turnover. ROI % Margin % Turnover

Conceptual Connection: Assume that all expectations for Year 4 were realized. Compute the expected ROI, margin, and turnover. ROI % Margin % Turnover

Explanation / Answer

Year 1 Year 2 Year 3 Sale          12,500,000       9,500,000      9,000,000 Operating Income            1,200,000       1,095,000          945,000 Average Assets          15,000,000    15,000,000    17,250,000 ROI (Operating Income / Average Assets) 8.00% 7.30% 5.48% Margin (Operating Income / Sales) 9.60% 11.53% 10.50% Turnover (Sales / Average Assets)                       0.83                 0.63                 0.52 Answer 1. Year 4 Sale            9,000,000 Operating Income                945,000 Average Assets (80% of 17,250,000)          13,800,000 ROI (Operating Income / Average Assets) 6.85% Margin (Operating Income / Sales) 10.50% Turnover (Sales / Average Assets)                       0.65 Answer 2. Year 4 Sale          12,500,000 Operating Income            1,200,000 Average Assets (80% of 17,250,000)          13,800,000 ROI (Operating Income / Average Assets) 8.70% Margin (Operating Income / Sales) 9.60% Turnover (Sales / Average Assets)                       0.91

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