You manage a division with similar restaurants (“X”, “Y” and “Z”) located in sim
ID: 2534425 • Letter: Y
Question
You manage a division with similar restaurants (“X”, “Y” and “Z”) located in similar locations in similar cities. You evaluate all three of them based on “Return on Sales”, “Asset turnover” and “Return on Investment”. The results of the most recent year:
X Y Z
Sales $1,500,000 $750,000 $3,750,000
Income $150,000 $75,000 $18,750
Assets (Investment) $600,000 $7,500,000 $2,500,000
All three parameters (“Return on Sales”, “Asset turnover” and “ROI”) are equally weighted. Calculate these three parameters for each restaurant. You have $10,000 to distribute to the three restaurant managers based on their results. Justify your distribution of this $10,000.
Explanation / Answer
1). Return on sales : Net Income / Sales
X = 150000 / 1500000 = 0.1 or 10%
Y = 75000 / 750000 = 0.1 or 10%
Z = 18750 / 3750000 = 0.005 or 0.5%
2). Asset turnover = Sales / Average total assets
X = 1,500,000 / 600,000 = 2.5
Y = 750,000 / 7,500,000 = 0.1
Z = 3,750,000 / 2,500,000 = 1.5
3). ROI = Net Income / Investment
X = 150000 / 600000 = 0.25 or 25%
Y = 75000 / 7500000 = 0.01 or 1%
Z = 18750 / 2500000 = 0.0075 or 0.75%
Here Restuarant Z has lowest Return on sales and ROI, hence $10000 cannot be distributed to this restuarant because it is earning less than others. Now there is only two left, X and Y, among these two departments both have same return on sales i.e 10% then we have to consider other factors i.e ROI and asset turnover. As per these parameters Restuarant X has better ROI and Asset turnover than Y hence $10000 should be given to restuarant X.
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