Question

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

	Year 1	Year 2
Return on investment	8%	12%
Net operating income	?	$120,000
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?

Answer 1

Step 1 Calculation of Sales of Year 2

Return on Investment (ROI) = Margin Percentage x Turnover

0.12 = Margin percentage x 2

Margin Percentage = 0.12/12 = 0.06

= 6%

Sales = Net Operating Income / Margin percentage

= $ 120,000 / 0.06

= $ 2,000,000

Step 2 :

Since Margin Percentage of year 2 is twice that of year 1,

margin percentage of year 1 = 0.06 / 2

= 0.03

Return on Investment (ROI) = Turnover x Margin percentage

0.08 = Turnover x 0.03

Hence Turnover = 0.08 / 0.03

= 2.67 (rounded figure)

Sales = Net operating Income / Margin percentage

1,000,000 = Net Operating Income / 0.03

Net operating Income = 1,000,000 x 0.03

= $ 30,000

Hence the above table can be summarized as

Particulars	Year 1	Year 2
Return on Investment	8%	12%
Net Operating Income	$ 30,000	$ 120,000
Turnover	2.67	2
Margin	3%	6%
Sales	$ 1,000,000	2,000,000