Page 958 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

Past year's return on investment:
ROI=Margin×Turnover
Income Sales
ROI= ×
Sales Investment
USD100,000 USD2,000,000
ROI= ×
USD 2,000,000 USD1,000,000
ROI=5 percent×2time
ROI = 10 per cent
• Increase margin through reducing expenses by USD 40,000; no effect on sales or investment.
USD 140,000 USD 2,000,000
ROI= ×
USD 2,000,000 USD 1,000,000
ROI=7 percent×2 time
ROI = 14 per cent
• Increase turnover through reducing investment in assets by USD 200,000; no effect on sales or investment.
USD 100,000 USD 2,000,000
ROI= ×
USD 2,000,000 USD 800,000
ROI=5 percent×2.5time
ROI = 12.5 per cent
• (a) Increase margin and turnover by disposing of nonproductive depreciable assets; income increased by USD 10,000;
investment decreased by USD 200,000; no effect on sales.
USD 110,000 USD 2,000,000
ROI= ×
USD 2,000,000 USD 800,000
ROI=5.5 percent×2.5 time
ROI = 13.75 per cent
• (b) Increase margin and turnover through increased advertising; sales increased by USD 500,000 and income by USD
50,000; no effect on investment.
USD 150,000 USD 2,500,000
ROI= ×
USD 2,500,000 USD 1,000,000
ROI=6 percent×2.5time
ROI = 15 per cent
• (c) Increase turnover through increased advertising; sales increased by USD 500,000 and income by USD 12,500; no effect
on investment.
ROI = USD 112,500 X USD 2,500,000
USD 2,500,000 USD 1,000,000
ROI = 4.5 % X 2.5 times
ROI = 11.25%
Exhibit 208: Strategies for increasing return on investment (ROI)

• By taking actions that affect both margin and turnover: For example, disposing of nonproductive
depreciable assets would decrease investment while also increasing income (through the reduction of

depreciation expense). Thus, both margin and turnover would increase. An advertising campaign would
probably increase sales and income. Turnover would increase, and margin might increase or decrease
depending on the relative amounts of the increases in income and sales.

Accounting Principles: A Business Perspective 959 A Global Text