Question

LA Fitness is a regional chain of health clubs. The manager of the clubs, who have the authority to make investments as needed are evaluated based on ROI. The company's NW DC club reported the follwoing results for the past year: Sales $12,500,000 Variable expenses 9,380,000 Contribution margin 3,220,000 Fixed expenses 2,716,000 Net operating income $504,000 Average operating assets $7,000,000 At the beginning of this year, the manager has a $750,000 investment opportunity with the following characteristics: Sales $560,000 Contribution margin ratio 50% of sales Fixed expenses $246,400 (Show your work) 1. What was last year's return on investment (ROI) for the club

Answer 1

LA Fitness

NW DC club

Last year's return on investment (ROI) for the club is:

= 7.2%.

Step-by-step explanation:

a) Data and Calculations:

Sales $12,500,000

Variable expenses 9,380,000

Contribution margin 3,220,000

Fixed expenses 2,716,000

Net operating income $504,000

Average operating assets $7,000,000

Return on investment = $504,000/$7,000,000 * 100

= 7.2%

The current investment opportunity this year:

Sales $560,000

Contribution margin ratio 50% of sales

Fixed expenses $246,400

Investment cost $750,000

Sales $560,000

Variable costs 280,000

Contribution margin 280,000 (50% of sales)

Fixed expenses $246,400

Net operating income $33,600

ROI = $33,600/$750,000 * 100 = 4.48%