Question

A division's operating data for the past two years is as follows: Year 1 Year 2...

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?

Homework Answers

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
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