Question

The Millard Division's operating data for the past two years are provided below:

	Year 1			Year 2
Return on investment		15	%		20	%
Net operating income		?		$	640,000
Turnover		?			5
Margin		?			?
Sales	$	3,340,000			?

Millard Division's margin in Year 2 was 120% of the margin in Year 1.

The net operating income for Year 1 was: (Round intermediate percentage computations to the nearest whole percent.)

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Multiple Choice

• $256,000

• $100,200

• $133,600

• $267,200

Answer 1

Answer: B = $ 100,200

:: Year – 2.

>> Average Asset year -2 = Net Operating Income / ROI

>> Average Asset year -2 = $ 640,000 / 20 %

>> Average Asset year -2 = $ 3,200,000.

>> Sales year -2 = Average Assets * Turnover ratio

>> Sales year -2 = $ 3,200,000 * 5

>> Sales year -2 = $ 16,000,000.

>> Margin year -2 = Net Operating Income / Sales

>> Margin year -2 = ( $ 640,000 * 100 ) / $ 16,000,000

>> Margin year -2 = 4 %.

:: Given that year -2 margin is 120% of year -1.

>> Then year – 1 margin = 4 / 120 %

>> Then year – 1 margin = 3.33 %

>> Then year – 1 margin = 3 %

>> Net operating income of year -1 = Sales * Margin

>> Net operating income of year -1 = $ 3,340,000 * 3 %

>> Net operating income of year -1 = $ 100,200