If the operating asset turnover ratio increased by 40 percent and the margin increased by 30 percent, the divisional ROI
A)would decrease by 70 percent.
B)would increase by 82 percent.
C)would increase by 30 percent.
D)cannot be determined.

Question

Quizplus · Accepted Answer

ROI = Margin x Asset Turnover Ratio
If the operating asset turnover ratio increases by 40 percent, the Asset Turnover Ratio in the above formula increases by 40/100 = 0.4
Let the initial ROI be represented by ROI1.
ROI1 = Margin x Asset Turnover Ratio
If the margin increases by 30 percent, the new margin can be represented by (1 + 30/100) = 1.3 times the initial margin.
Let the new ROI be represented by ROI2.
ROI2 = (1.3 x Margin) x (1.4 x Asset Turnover Ratio)
ROI2 = 1.82 x ROI1
Therefore, the divisional ROI would increase by 82 percent.

If the Operating Asset Turnover Ratio Increased by 40 Percent