If the operating asset turnover ratio increased by 30 percent and the margin increased by 20 percent,how would the divisional ROI react?
A)increase by 20 percent
B)increase by 56 percent
C)decrease by 50 percent
D)decrease by 60 percent

Question

Quizplus · Accepted Answer

The divisional ROI can be calculated as the product of operating asset turnover ratio and profit margin. 
If the operating asset turnover ratio increased by 30 percent, we can assume that the sales have also increased by 30 percent. 
New operating asset turnover ratio = Old operating asset turnover ratio * (1 + 30%) 
New profit margin = Old profit margin * (1 + 20%)

Therefore, the new divisional ROI will be: 
New divisional ROI = Old divisional ROI * (1 + 30%) * (1 + 20%) 
= Old divisional ROI * 1.56

This means that the divisional ROI will increase by 56 percent (option B) and not by 20 percent (option A), as both the margin and the operating asset turnover ratio have increased. The other options (C and D) suggest a decrease, but this is not possible based on the information provided.

If the Operating Asset Turnover Ratio Increased by 30 Percent