A D H XtreMel Fitness Inc. is a health club. The following results were recorded for last year 1 M N 1 2 3 1 Sales Operating income Asset Turnover $2,000,000 $150,000 2.5 Required: 3.a) Calculate the company's ROI for the past year using margin and turnover. (2 marks) 3 0 Margin 1 Turnover 2 Return on investment 3 b) Assume the minimum required rate of return on average operating assets is 12%. Calculate the club's Residual Income. (3 marks) 5 - Residual income . c) The owner is reviewing growth plans for the business. It is estimated that opening a second health club would increase Total Sales from $2,000,000 to $3,000,000 and Total Operating Income from $150,000 to $195,000, but also increase average operating assets by $350,000. Calculate the revised ROI for the total company assuming a 2nd health club is opened. If the expansion decision is based on ROI, will the second club be opened? Explain why. (6 marks) ROIRI V5 New 19 M N c) 20 The owner is reviewing growth plans for the business. It is estimated that opening a second health club would increase Total Sales from $2,000,000 to $3,000,000 and Total Operating Income from $150,000 to $195,000, but also increase average operating assets by $350,000 Calculate the revised ROI for the total company assuming a 2nd health club is opened. If the expansion decision is based on ROI, will the second club be opened? Explain why. (6 marks) 21 5 Decision 7 3 Reason . d) Calculate the Residual income for the 2nd health club assuming Operating income = $45,000 and Average operating assets required = $350,000 for the 2nd club. If the decision is based on residual income, will the second location be opened? (3 marks) Residual income Decision ROIRI V5 New