Suppose the operating asset turnover ratio increased by 35% and the margin increased by 25%. What would be the effect on the divisional ROI?
A) It would decrease by 60%.
B) It would decrease by 50%.
C) It would increase by 20%.
D) It would increase by 69%.

Question

Quizplus · Accepted Answer

The divisional ROI (Return on Investment) is calculated by multiplying the operating asset turnover ratio and the margin.

Let's assume the initial ROI was x.

If the operating asset turnover ratio increases by 35%, the new operating asset turnover ratio would be 1.35 times the original value (1 + 0.35).

If the margin increases by 25%, the new margin would be 1.25 times the original value (1 + 0.25).

Therefore, the new ROI can be calculated as:

New ROI = (1.35 * Original Operating Asset Turnover Ratio) x (1.25 * Original Margin) = 1.6875 * Original ROI

This implies that the new ROI would increase by 68.75% (1.6875 - 1) compared to the original ROI.

Hence, the correct answer is D.

Suppose the Operating Asset Turnover Ratio Increased by 35% and the Margin