Question

Tropic Corp. has sales revenue of $507,000 resulting in operating income of $61,000. Average invested assets total $607,000, and the cost of capital is 6%. Calculate the return on investment if sales increase by 10% and the profit margin and invested assets remain the same. (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

Answer:

11.03%

Explanation:

Return on investment is a performance measurement tool used to evaluate the financial performance of investments.

The formula for calculating ROI is:

ROI = Net profit/PBIT/Operating profit ÷ cost of investment

Lets first calculate profit margin before the 10% increase in sales. Profit margin is calculated as:

Profit Margin = operating income ÷ sales revenue × 100

PM = 61000 ÷ 507000 × 100

PM = 12.03%

Now lets incorporate the 10% increase in sales in order to see it's effect on profit margin ratio.

Sales revenue after the increase by 10% = 110% × 507000

Sales revenue after the increase by 10% = 557700

According to the question profit margin remains the same but due to increase in sales revenue the operating income will increase too.

Operating income after increase in sales = 12% × 557700

Operating income after increase in sales = 66924

Now we calculate ROI after the increase in sales by 10%.

ROI = 66924 ÷ 607000 × 100

ROI = 11.03%

Answer 2

Answer:

New sales = 110% x $507,000 = $557,700

New operating income = 110% x $61,000 = $67,100

Return on investment = Operating income/Average invested assets x 100

Return on investment = $67,100/$607,000 x 100

Return on investment =11.05%

Explanation:

Return on investment is the ratio of operating income to average invested assets. In this question, sales increased by 10%. 10% increase in sales increases the operating profit by 10%. Thus, we will divide the operating income by the average invested assets in order to obtain return on equity.