Chapter 24, Problem 13CP

To determine

EXPANDED ROI (RETURN ON INVESTMENT)FORMULA : Management often restates the ROI formula to determine what drive's a company's ROI. This is widely known as expanded ROI formula. This can be calculated by multiplying profit margin ration and asset turnover ratio.

$\text{(EXPANDED) ROI = }\frac{\text{NET PROFIT}}{\text{SALES}}\times \frac{\text{SALES}}{\text{AVERAGE TOTAL ASSETS}}=\frac{\text{NET PROFIT}}{\text{SALES}}$

An expanded ROI shows two components.

a) Profit margin i.e. How much profit the company earns on every $1.00 sales

b) Asset turnover i.e. How efficiently a company uses its assets to generate sales.

AVERAGE TOTAL ASSETS: The average total assets is the average of the aggregate assets during a two year period.

$\text{ASSETS}=\frac{\text{TOTAL ASSETS(CURRENT YEAR)+TOTAL ASSETS(PREVIOUS YEAR}}{2}$

To determine:

To use the expanded ROI formula to confirm the results from Requirement 10 and interpret the results