# Division a division b division c current 9 investment

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Division A Division B Division C Current ROI 20% 18% 9% Investment opportunity return 17% 17% 17% Effect on ROI if opportunity is accepted Decrease Decrease Increase Accept or reject decision Reject Reject Accept b. If performance is being measured by RI, which division or divisions will probably accept the opportunity? Reject? Why? Division A Division B Division C Current RI \$75,000 \$0 (\$60,000) Investment opportunity return 17% 17% 17% Minimum required rate of return 15% 18% 12% Effect on RI if opportunity is accepted Increase Decrease Increase Accept or reject decision Accept Reject Accept

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Exercise 11-12 Effects of Changes in Profits and Assets on Return on Investment Given: The Abs Shoppe is a regional chain of health clubs. The managers of the clubs, who have authority to make investments as needed, are evaluated based largely on ROI. The Abs Shoppe reported the following results for the past year: Abs Shoppe Sales \$800,000 Net operating income \$16,000 Average operating assets \$100,000 Required: The following questions are to be considered independently. Carry out all computations to two decimal places. 1. Compute the club's ROI a. ROI = Net operating income / Average operating assets b. ROI = margin X turnover ROI = (Net operating income / Sales) X (Sales / Average operating assets) Abs Shoppe Margin 2.00% Turnover 8.00 b. ROI 16.00% a. ROI 16.00% 2. increase in operating assets. What would be the club's ROI? Original Changes New Sales \$800,000 \$80,000 \$880,000 Net operating income \$16,000 \$6,000 \$22,000 Average operating assets \$100,000 \$0 \$100,000 Abs Abs Shoppe Shoppe Margin 2.00% 2.50% Turnover 8.00 8.80 ROI 16.00% 22.00% ROI 16.00% 22.00% 3. change in sales or operating assets. What would be the club's ROI? Original Changes New Sales \$800,000 \$0 \$800,000 Net operating income \$16,000 \$3,200 \$19,200 Average operating assets \$100,000 \$0 \$100,000 Abs Abs Shoppe Shoppe Margin 2.00% 2.40% Turnover 8.00 8.00 ROI 16.00% 19.20% ROI 16.00% 19.20% 4. change in sales or net operating income. What would be the club's ROI? Original Changes New Sales \$800,000 \$0 \$800,000 Net operating income \$16,000 \$0 \$16,000 Average operating assets \$100,000 (\$20,000) \$80,000 Abs Abs Shoppe Shoppe Margin 2.00% 2.00% Turnover 8.00 10.00 ROI 16.00% 20.00% ROI 16.00% 20.00% Assume that the manager of the club is able to increase sales by \$80,000 and that as a result net operating income increases by \$6,000 . Further assume that this is possible without any Assume that the manager of the club is able to reduce expenses by \$3,200 without any Assume that the manager of the club is able to reduce operating assets \$20,000 without any
Problem 11-19: Perverse effects of some performance measures Given: There is often more than one way to improve a performance measure. Unfortunately, some of the actions taken by managers to make their performance look better, may actually harm the organization. For example, suppose the marketing department is held responsible only for increasing the performance measure "total revenues." Increases in total revenues may be achieved by working harder and smarter, but they can also usually be achieved by simply cutting prices. The increase in volume from cutting prices almost always results in greater total revenues; however, it does not always lead to greater total profits. Those who

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• Fall '12
• StephenD.Joyce
• Cycle Time, Division B

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