Question

Sales and avg operating assets for company P and company Q are given below:

................................Sales............Avg Op Assets
Company P .......$20,000.............$8,000
Company Q.......$50,000..............$10,000

What is the margin that each company will have to earn in order to generate a return on investment of 20%?

A) 12% and 16%
B) 50% and 100%
C)8% and 4%
D)2.5% and 5%

Answer 1

To generate a return on investment of 20%, Company P and Company Q need to earn a margin of approximately 16.67%.

Step-by-step explanation:

You've asked what margin each company will have to earn to generate a return on investment (ROI) of 20%. To calculate this, we use the formula for ROI which is (Net Profit / Average Operating Assets) × 100. Given an ROI of 20%, we rearrange the formula to find the required margin: Net Profit = ROI × Average Operating Assets / 100.

Company P's required margin will be (20% × $8,000) / $20,000 = 0.8 or 8%. Company Q's required margin will be (20% × $10,000) / $50,000 = 0.4 or 4%. Therefore, Company P needs an 8% margin and Company Q needs a 4% margin to achieve a 20% ROI.

Margin is the ratio of net income to sales revenue, expressed as a percentage. To calculate the margin needed to generate a return on investment (ROI) of 20%, we can use the formula:

Margin = ROI / (1 + ROI)

For Company P, the sales are $20,000 and the average operating assets are $8,000. Plugging in the values:

Margin = 0.20 / (1 + 0.20) = 0.20 / 1.20 = 0.1667

So, Company P needs to earn a margin of approximately 16.67% to generate a 20% ROI.

For Company Q, the sales are $50,000 and the average operating assets are $10,000:

Margin = 0.20 / (1 + 0.20) = 0.20 / 1.20 = 0.1667

Therefore, Company Q also needs to earn a margin of approximately 16.67% to generate a 20% ROI.