The Abs Shoppe is a regional chain of health clubs. The managers of the clubs, w
ID: 2496834 • Letter: T
Question
The Abs Shoppe 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 Abs Shoppe reported the following results for the past year:
The Abs Shoppe 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 Abs Shoppe reported the following results for the past year:
Required 1. Compute the club's return on investment (ROI). your answers to 2 decimal places.) Margin Tunover ROIExplanation / Answer
Part 1)
The club's return on investment can be calculated with the use of following formula:
ROI = Margin*Turnover
Where Margin = Net Income/Sales*100
and Turnover = Sales/Average Operating Assets
__________
Using the information provided in the question, we get,
Margin = 12,240/720,000*100 = 1.70%
Turnover = 720,000/100,000 = 7.2
ROI = 1.70%*7.2 = 12.24%
__________
Part 2)
The value of revised sales would be = 720,000 + 72,000 = $792,000
The value of revised operating income would be = 12,240 + 5,184 = $17,424
__________
Using the revised values in formulas mentioned above, we get,
Margin = 17,424/792,000*100 = 2.20%
Turnover = 792,000/100,000 = 7.92
ROI = 2.20%*7.92 = 17.42%
__________
Part 3)
Reduction in operating expenses would result in an increase in the operating income. It will have no effect on the value of sales or operating assets.
The value of revised operating income would be = 12,240 + 2,880 = $15,120
__________
Using the revised value of operating income in formulas mentioned above, we get,
Margin = 15,120/720,000*100 = 2.10%
Turnover = 720,000/100,000 = 7.2
ROI = 2.10%*7.2 = 15.12%
__________
Part 4)
The value of revised operating assets would be = 100,000 - 20,000 = $80,000
__________
Using the revised value of operating assets in formulas mentioned above, we get,
Margin = 12,240/720,000*100 = 1.70%
Turnover = 720,000/80,000 = 9
ROI = 1.70%*9 = 15.30%
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