Question

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

	Year 1	Year 2
Return on investment	10%	14%
Net operating income	?	$140,000
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?

Multiple Choice

• $70,000

• $140,000

• $35,000

• $100,000

Answer 1

Answer : $35000 (explanation below)

year 2 return on investment = 14%

return on investment = net operating income/total invested assets

Total invested assets = net operating income/return on investment

= $140000/14% = $1000000

turnover = 2

therefore turnover = sales/total invested assets

total invested assets × turnover = sales

$1000000×2 = $2000000

Sales = $2000000

margin = net operating income/sales×100

= $140000/$2000000×100 = 7%

margin of year 2 = 7%

given that margin of year 1 × 2 times = margin of year 2

= Margin of year 1 = 7%/2 = 3.5%

margin of year 1 = 3.5%

therefore margin of year 1 = net operating income/Sales net operating income year 1 = Sales× margin of year 1

= $1000000×3.5% = $35000

net operating income of year 1 = $35000

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