Question

The National Division of Excellent Products Company had a turnover ratio of 4.50 and a margin of 0.15. Which of the following is the return on investment (ROI)? (Note: Round answer to two decimal places.) a. 42.00% b. 23.80% c. 73.80% d. 67.50%

Answer 1

Here,

We are provided with :

1) turnover ratio = 4.5

2) Margin = 0.15

Required:

ROI =?

Now let us see the relation between the ratios provided and the ratio required .

Formula for turnover ratio :

Net sales /Total assets

Formula for Margin :

Net profit / Net sales

Formula for ROI :

Net profit / total assets

Now if we give a close look to the formulas, we can see that on multiplying turnover ratio and margin , we get ROI

(Net sales / Total assets)* (Net profit / Net sales )= Net profit / total assets

4.5*.15 = 67.5%

I hope it makes sense to you :)

Answer 2

The correct answer is: "d) 67.5%".

The turnover ratio is the number of occasions in which your stock of products has been completely sold during a given period of time. In other words, how fast it sells its inventory.

If in a given period, a company has managed to sell its inventory 4.5 times and each time it does, it gains a contribution margin of 15%, This means that the overall return of investment in that given period will be 4.5 times 15% or 67.5%.

In other words, the investor will get back the money he has invested in 1.48 years.