Question

A division's operating data for the past two years is as follows:

	Year 1	Year 2
Return on investment	14%	18%
Net operating income	?	$180,000
Turnover	?	2
Margin	?	?
Sales	$1,000,000	?

In Year 2 the margin was twice as much as the margin in Year 1. How much was the division’s Net Operating Income for Year 1?

• $45,000

• $140,000

• $180,000

• $90,000

Answer 1

Answer: D = $ 45,000

:: Year – 2.

>> Average Asset year -2 = Net Income / ROI
>> Average Asset year -2 = $ 180,000 / 18%
>> Average Asset year -2 = $ 1,000,000.

>> Sales year -2 = Average Assets * Turnover ratio
>> Sales year -2 = $ 1,000,000 * 2
>> Sales year -2 = $ 2,000,000.

>> Margin year -2 = Net Income / Sales
>> Margin year -2 = ( $ 180,000 * 100 ) / $ 2,000,000
>> Margin year -2 = 9 %.

:: Given that year -2 margin is twice of year -1.

>> Then year – 1 margin = 4.5 %.

>> Net operating income of year -1 = Sales * Margin
>> Net operating income of year -1 = $ 1,000,000 * 4.5%
>> Net operating income of year -1 = $ 45,000

If you have any doubts please comment on the answer.