Choice "D" is correct. Return on investment is the ratio of operating income to average operating assets and is computed as follows based on Year 2 and Year 3 data: Operating revenue (Year 3) | | $1,100,000 | Operating expense (Year 3) | | (700,000) | | Operating income | | 400,000 | Operating assets (Year 2) | 1,200,000 | | Operating assets (Year 3) | 2,000,000 | | | Total | 3,200,000 | | Average operating assets | ÷2 | 1,600,000 | | Return on investment | | 25% |
Choice "c" is incorrect per the above computation.Choice "a" is incorrect. The year 3 return on investment is not computed by combining revenues, expenses, and assets for all year's presented.Choice "b" is incorrect. The year 3 return on investment is based on the average assets (($1,200,000 + $2,000,000)/2$1,600,000), not simply on the total assets at the end of year 3 ($2,000,000).
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