Question

Return on Investment, Margin, Turnover Ready Electronics is facing stiff competition from imported goods. Its operating income margin has been declining steadily for the past several years. The company has been forced to lower prices so that it can maintain its market share. The operating results for the past 3 years are as follows: Year 1 Year 2 Year 3 Sales $10,000,000 $9,500,000 $ 9,000,000 Operating income 1,200,000 1,045,000 945,000 Average assets 15,000,000 15,000,000 15,000,000 For the coming year, Ready's president plans to install a JIT purchasing and manufacturing system. She estimates that inventories will be reduced by 70% during the first year of operations, producing a 20% reduction in the average operating assets of the company, which would remain unchanged without the JIT system. She also estimates that sales and operating income will be restored to Year 1 levels because of simultaneous reductions in operating expenses and selling prices. Lower selling prices will allow Ready to expand its market share. (Note: Round all numbers to two decimal places.) Required: 1. Compute the ROI, margin, and turnover for Years 1, 2, and 3. Year 1 Year 2 Year 3 ROI 0.08 X% % % Margin % % % Turnover 2. Conceptual Connection: Suppose that in Year 4 the sales and operating income were achieved as expected, but inventories remained at the same level as in Year 3. Compute the expected ROI, margin, and turnover. ROI % Margin %

Answer 1

Answer 1

Parameter		Year 1	Year 2	Year 3
a	Sales	10,000,000	9,500,000	9,000,000
b	Operating Income	1,200,000	1,045,000	945,000
c	Average Assets	15,000,000	15,000,000	15,000,000
d	ROI (b/c)%	8.00	6.97	6.30
e	Margin (b/a)%	12	11	10.50
f	Turnover (a/c)	0.67	0.63	0.60

answer 2

	Year 4
Sales	10,000,000
Operating Income	1,200,000
Average Assets	15,000,000
ROI (b/c)%	8.00
Margin (b/a)%	12
Turnover (a/c)	0.67

ROI has increased because, Expenses Decreased and Asset turned over at higher rate (sales Increased)

Answer 3

Parameter		Year 4
a	Sales	9,000,000
b	Operating Income	945,000
c   (20% reduction)	Average Assets	12,000,000
d	ROI (b/c)%	7.88
e	Margin (b/a)%	10.50
f	Turnover (a/c)	0.75

Here the ROI increased because Assets Decreased

Answer to Question 4 ( All expectation Achived)

Parameter		Year 4
a	Sales	10,000,000
b	Operating Income	1,200,000
c	Average Assets	12,000,000
d	ROI (b/c)%	10.00
e	Margin (b/a)%	12.00
f	Turnover (a/c)	0.83

ROI has increased because, Expenses Decreased and Asset turned over at higher rate