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Calculating net income, margin and required sales

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Manyops, Inc., is a manufacturing firm that has experienced strong competition in its traditional business. Management is considering joining the trend to the "service economy" by eliminating its manufacturing operations and concentrating on providing specialized maintenance services to other manufacturers. Management of Manyops, Inc., has had a target ROI of 16% on an asset base that has averaged $6 million . To achieve this ROI, average asset turnover of 2 was required. If he company shifts its operations from manufacturing to providing maintenance services, it is estimated that average assets will decrease to $3 million.

Required
a)Calculate net income, margin, sales required for Manyops,Inc., to achieve its target ROI as a manufacturing firm.
b) Assume that average margin of maintenance services firms is 2.7%, and that the average ROI of such firms is 17%. Calculate the net income, sales, and the asset turnover that Manyops, Inc., will have if the change to services is made and the firm is able to earn an average margin and achieve a 17% ROI.

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Solution depicts the steps to calculate net income, margin and required level of sales.

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a) Return on Investment=ROI=16%
Average Asset=$6 million
Net income=ROI*Average Asset=16%*6=0.96 million or $960,000
Asset turnover ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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