Question

assume the following information: potential gross income: $1,200,000; vacancy rate: 9%; net operating income: $579,000; operating expenses: $491,400; capital expenditures: $80,000. the operating expense ratio is equal to

Answer 1

The operating expense ratio is found by dividing the operating expenses by the Effective Gross Income, which is the Potential Gross Income adjusted for the vacancy rate. The ratio for the given scenario is 45%.

Step-by-step explanation:

To find the operating expense ratio, we need to use the given information. This ratio is calculated by dividing the operating expenses by the gross operating income.

However, first we need to adjust the Potential Gross Income for the vacancy rate to get the Effective Gross Income.

1. Calculate Effective Gross Income:

Effective Gross Income = Potential Gross Income - (Potential Gross Income × Vacancy Rate)

$1,200,000 - ($1,200,000 × 9%) = $1,200,000 - $108,000 = $1,092,000

1. Calculate Operating Expense Ratio:

Operating Expense Ratio = Operating Expenses / Effective Gross Income

$491,400 / $1,092,000 = 0.45 or 45%