The house wares division of a department store currently generates a return on investment of 8.4% on margin of .07 and asset turnover of 1.2. The company's required rate of return is 15%. Calculate the amount operating income needed for the division to reach the company's required rate of return. $115,800 $75,600 O $63,000 O $112,500 Solution Return on investment Margin x Asset turnover. Currently the company's ROI is 0.07 x 1.2 = 0.084. To increase it to 0.15 by increasing margin, restate the formula as follows: 0.15= new margin x 1.2. Solve for the new margin by 0.15/1.2 = 0.125. Margin would need to increase from 0.07 to 0.125, an increase of .055 5.5%. To accomplish this using operating income, solve for operating income in the following: Margin = Operating income/Sales revenue. Margin needs to increase to 0.125.0.125 = Operating income/$900,000. Operating income = $900,000 x 0.125 = $112,500.
The house wares division of a department store currently generates a return on investment of 8.4% on margin of .07 and asset turnover of 1.2. The company's required rate of return is 15%. Calculate the amount operating income needed for the division to reach the company's required rate of return. $115,800 $75,600 O $63,000 O $112,500 Solution Return on investment Margin x Asset turnover. Currently the company's ROI is 0.07 x 1.2 = 0.084. To increase it to 0.15 by increasing margin, restate the formula as follows: 0.15= new margin x 1.2. Solve for the new margin by 0.15/1.2 = 0.125. Margin would need to increase from 0.07 to 0.125, an increase of .055 5.5%. To accomplish this using operating income, solve for operating income in the following: Margin = Operating income/Sales revenue. Margin needs to increase to 0.125.0.125 = Operating income/$900,000. Operating income = $900,000 x 0.125 = $112,500.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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7.
Transcribed Image Text:The house wares division of a department store currently generates a return on investment of 8.4% on margin of .07 and asset
turnover of 1.2. The company's required rate of return is 15%. Calculate the amount operating income needed for the division to
reach the company's required rate of return.
$115,800
$75,600
$63,000
$112,500
Solution
Return on investment = Margin x Asset turnover. Currently the company's ROI is 0.07 x 1.2 = 0.084. To increase it to 0.15 by
increasing margin, restate the formula as follows:
0.15= new margin x 1.2. Solve for the new margin by 0.15/1.2 = 0.125. Margin would need to increase from 0.07 to 0.125, an
increase of .055 5.5%.
To accomplish this using operating income, solve for operating income in the following: Margin = Operating income/Sales
revenue. Margin needs to increase to 0.125.0.125 = Operating income/$900,000.
Operating income = $900,000 x 0.125 = $112,500.
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