Fitness Fanatics is a regional chain of health clubs. The managers of the clubs,

Question

Fitness Fanatics 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 company’s Springfield Club reported the following results for the past year: 1) Compute the Springfield club’s return on investment (ROI) 2) Assume that the manager of the club is able to increase sales by $70,000 and that, as a result, net operating income increases by $118,200. Further assume that this is possible without any increase in operating assets. What would be the club’s return on investment (ROI)? 3) Assume that the manager of the club is able to reduce expenses by $14,000 without any change in sales or operating assets. What would be the club’s return on investment (ROI)

Explanation / Answer

Ans.1 Margin    =   Net operating income / Sales * 100 70000 / 1400000 * 100 5% Turnover = Sales / Average operating assets    1400000 / 350000 4 times ROI   =   Net operating income / Average operating assets * 100 70000 / 350000 * 100 20% Ans.2 New sales (1400000 + 70000) = 1470000 New Net operating income (70000 + 118200) = 188200 Average operating assets = 350000 ROI   =   Net operating income / Average operating assets * 100 188200 / 350000 * 100 53.77% Ans.3 Reducing expenses will increase net operating income by the same amount (70000 + 14000) = 84000 Average operating assets = 350000 ROI   =   Net operating income / Average operating assets * 100 84000 / 350000 * 100 24% Ans.4 Average operating assets (350000 - 70000) = 280000 Net operating income = 70000 ROI   =   Net operating income / Average operating assets * 100 70000 / 280000 * 100 25%

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