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: Sales $ 850,000 Net operating income $ 25,500 Average operating assets $ 100,000 The following questions are to be considered independently.
Assume that the manager of the club is able to reduce expenses by $3,400 without any change in sales or average operating assets. What would be the club’s return on investment (ROI)?

Answer 1

Answer:

Old ROI   = 25.5%

New ROI = 28.9%

Explanation:

Current ROI =  Net operating Income/Average Operating Assets

                   = ($ 25,500 /$ 100,000) *100%

                   = 25.5%

Assume manager of the club reduce expenses by $3,400 and variables remained unchanged.

New Net Operating Income = $25,500 + $3,400

                                               =  $28,900

Hence, New ROI = ($28,900/100,000) *100%

                            =28.9%