Effects of Changes in Profits and Assets on Return on Investment (ROI) [LO1]

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:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . $800,000 Net operating income . . . . . . . . . . . . $16,000 Average operating assets . . . . . . . . . $100,000 Required:

The following questions are to be considered independently. Carry out all computations to two decimal places.

1. Compute the club’s return on investment (ROI).
2. Assume that the manager of the club is able to increase sales by $80,000 and that as a result net operating income increases by $6,000. 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 $3,200 without any change in sales or operating assets. What would be the club’s return on investment (ROI)?
4. Assume that the manager of the club is able to reduce operating assets by $20,000 without any change in sales or net operating income. What would be the club’s return on investment (ROI)?