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

• $140,000

• $35,000

• $100,000

• $70,000

Answer 1

the division’s Net Operating Income for Year 1:

$35,000

Working:

For Year 2-

1. Return on investment = Net Operating income / Average Operating Asset.

Average operating asset = Net operating income / Return on investment.

Average operating asset = ($1,40,000 / 14%) = $ 1,000,000.

2. Turnover = Sales / Average Operating asset.

Sales = Turnover * Average operating asset,

Sales = 2 * $ 1,000,000 = $ 2,000,000.

3. Margin = ( Net operating income ) / Sales

Margin for year 2 = ( $ 140,000 ) / $ 2,000,000 = 0.07.

For Year 1-

Given year 2 margin is 200 % of year 1.

1. Year 1 Margin = (0.07 / 200%) = 0.035

2. Net operating income = Sales * Margin

Net operating income = $ 1,000,000 * 0.035 = $35,000