Return on Investment, Margin, Turnover
Ready Electronics is facing stiff competition from importedgoods. Its operating income margin has been declining steadily forthe past several years. The company has been forced to lower pricesso that it can maintain its market share. The operating results forthe past 3 years are as follows:
| Year 1 | Year 2 | Year 3 |
| Sales | $13,500,000 | $ 9,500,000 | $ 9,000,000 |
| Operating income | 1,200,000 | 1,445,000 | 945,000 |
| Average assets | 15,000,000 | 15,000,000 | 17,750,000 |
For the coming year, Ready's president plans to install a JITpurchasing and manufacturing system. She estimates that inventorieswill be reduced by 70% during the first year of operations,producing a 20% reduction in the average operating assets of thecompany, which would remain unchanged without the JIT system. Shealso estimates that sales and operating income will be restored toYear 1 levels because of simultaneous reductions in operatingexpenses and selling prices. Lower selling prices will allow Readyto expand its market share.
(Note: Round all numbers to two decimal places.)
Required:
1. Compute the ROI, margin, and turnover forYears 1, 2, and 3.
| Year 1 | Year 2 | Year 3 |
| ROI | % | % | % |
| Margin | % | % | % |
| Turnover | | | |
2. Conceptual Connection: Suppose that in Year4 the sales and operating income were achieved as expected, butinventories remained at the same level as in Year 3. Compute theexpected ROI, margin, and turnover.
Why did the ROI increase over the Year 3 level?
The ROI increased because expenses decreased and assetsturned over at a higher rate (sales increased).
3. Conceptual Connection: Suppose that thesales and net operating income for Year 4 remained the same as inYear 3 but inventory reductions were achieved as projected. Computethe ROI, margin, and turnover.
Why did the ROI exceed the Year 3 level?
The ROI increased because assets decreased.
4. Conceptual Connection: Assume that allexpectations for Year 4 were realized. Compute the expected ROI,margin, and turnover.
Why did the ROI increase over the Year 3 level?
The ROI increased because expenses decreased and assetsturned over at a higher rate.
