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

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 of investment. The company's Springfield Club reported the following results for the past year:

Sales: $890,000

Net operating income: $30,260

Average operating assets: $100,000

Compute the Springfield Club's return on investment.

Assume that the manager of the club is able to increase sales by $89,000 and that, as a result, net operating income increases by $7,921. Further assume that this is possible without any increase in operating assets. What would be the club's return on investment?

Assume that the manager of the club is able to reduce expenses by $3,560 without any change in sales or operating assets. What would be the club's return on investment?

Assume that the manager of the club is able to reduce operating assets by $50,000 without any charge in sales or net operating income. What would be the club's return on investment?

Return on Investment:

Return on investment (ROI) is the financial ratio, which estimates the performance of the investments. ROI is engaged in determining the return on a specific investment. High ROI represents that the earnings on the investment are beneficial to its price and vice versa.

Answer and Explanation:

The formula for return on investment is:

{eq}{\rm{ROI}} = \dfrac{{{\rm{Net}}\;{\rm{operating}}\;{\rm{income}}}}{{{\rm{Average}}\;{\rm{operating}}\;{\rm{assets}}}} \times 100 {/eq}

Springfield Club's return on investment:

{eq}\begin{align*} {\rm{ROI}} &= \dfrac{{{\rm{Net}}\;{\rm{operating}}\;{\rm{income}}}}{{{\rm{Average}}\;{\rm{operating}}\;{\rm{assets}}}} \times 100\\ &= \dfrac{{30,260}}{{100,000}} \times 100\\ &= 30.26\;\% \end{align*} {/eq}

If sales is increased by $89,000 and net operating income is increased by $ 7,921:

{eq}\begin{align*} {\rm{ROI}} &= \dfrac{{{\rm{Net}}\;{\rm{operating}}\;{\rm{income}}}}{{{\rm{Average}}\;{\rm{operating}}\;{\rm{assets}}}} \times 100\\ &= \dfrac{{30,260 + 7,921}}{{100,000}} \times 100\\ &= \dfrac{{38,181}}{{100,000}} \times 100\\ &= 38.18 \end{align*} {/eq}

If expenses is reduce by $3,560:

{eq}\begin{align*} {\rm{ROI}} &= \dfrac{{{\rm{Net}}\;{\rm{operating}}\;{\rm{income}}}}{{{\rm{Average}}\;{\rm{operating}}\;{\rm{assets}}}} \times 100\\ &= \dfrac{{30,260 + 3,560}}{{100,000}} \times 100\\ &= \dfrac{{33,820}}{{100,000}} \times 100\\ &= 33.82\;\% \end{align*} {/eq}

If operating assets is reduced by $50,000:

{eq}\begin{align*} {\rm{ROI}} &= \dfrac{{{\rm{Net}}\;{\rm{operating}}\;{\rm{income}}}}{{{\rm{Average}}\;{\rm{operating}}\;{\rm{assets}}}} \times 100\\ &= \dfrac{{30,260}}{{100,000 - 50,000}} \times 100\\ &= \dfrac{{30,260}}{{50,000}} \times 100\\ &= 60.52\;\% \end{align*} {/eq}


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Return on Investment: Definition, Formula & Example

from Intro to Business: Help and Review

Chapter 25 / Lesson 6
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