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Can you explicitly explain how you get $900,000 in the solution? The house wares division of a department store currently generates a return on investment
Can you explicitly explain how you get $900,000 in the solution?
The house wares division of a department store currently generates a return on investment of 8.4% on margin of .07 and asset turnover of 1.2. The company's required rate of return is 15%. Calculate the amount operating income needed for the division to reach the company's required rate of return. $115,800$75,600$63,000$112,500 Solution Return on investment = Margin x Asset turnover. Currently the company's ROI is 0.071.2=0.084. To increase it to 0.15 by increasing margin, restate the formula as follows: 0.15= new margin x 1.2. Solve for the new margin by 0.15/1.2=0.125. Margin would need to increase from 0.07 to 0.125 , an increase of .0555.5%. To accomplish this using operating income, solve for operating income in the following: Margin = Operating income/Sales revenue. Margin needs to increase to 0.125.0.125= Operating income /$900,000. Operating income =$900,0000.125=$112,500Step by Step Solution
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