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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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If sales and average operating assets for Year 2 are identical to their values in Year 1, yet operating income is higher, Year 2 return on investment (compared with Year 1 ROI) will

  1. a. decrease.
  2. b. increase.
  3. c. stay the same.
  4. d. The direction of change in ROI cannot be determined by this information.

To determine

Identify the change in ROI of Year 2 as compared to the ROI of Year 1.

Explanation

Return on Investment (ROI):

Return on investment can be defined as the amount of profit earned by the company on per dollar of investment. It can be computed by dividing operating income by the average operating assets.

b.

If the operating income of Year 2 is higher than the operating income of Year 1 having sales and average operating assets constant for both the years, then there will be an increase in the ROI of Year 2. Therefore, this option is correct.

a.

ROI is calculated by dividing operating income by average operating assets...

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