ROI is calculated as net income divided by total assets. One way to solve this problem is to set up some actual numbers for a basic ROI. For example, sales = $500,000, expenses = $400,000, net income = $100,000 and total assets = $400,000. ROI = $100,000 ÷ $400,000, or .25. If we increase both the profit margin on sales and the assets of the company by the same percentage, say 10%, ROI will remain unchanged. Net income will increase by 10% to $110,000 and total assets will increase by 10% to $440,000. ROI will be $110,000 ÷ $440,000, which is unchanged at .25. ROI is calculated as net income divided by total assets. One way to solve this problem is to simply set up some actual numbers for a basic ROI. For example, sales = $500,000, expenses = $400,000, net income = $100,000 and total assets = $400,000. ROI = $100,000 ÷ $400,000, or .25. If we reduce expenses by $50,000 and increase total assets by $50,000, net income will increase by $50,000 to $150,000 because sales remained the same while expenses were reduced. Total assets will increase by $50,000 to $450,000. ROI will change to $150,000 ÷ $450,000, which is .33, an increase. ROI is calculated as net income divided by total assets. One way to solve this problem is to set up some actual numbers for a basic ROI. For example, sales = $500,000, expenses = $400,000, net income = $100,000 and total assets = $400,000. ROI = $100,000 ÷ $400,000, or .25. If we decrease sales and increase expenses by $25,000 each, sales will decrease to $475,000, expenses will increase to $425,000, and net income will fall to $50,000. ROI will become $50,000 ÷ $400,000, which is lower. ROI is calculated as net income divided by total assets. One way to solve this problem is to set up some actual numbers for a basic ROI. For example, sales = $500,000, expenses = $400,000, net income = $100,000 and total assets = $400,000. ROI = $100,000 ÷ $400,000, or .25. If we increase sales, expenses and total assets by the same amounts, for example by $50,000, the new amounts will be: sales = $550,000, expenses = $450,000, net income = $100,000 (unchanged because both sales and expenses increased by the same amount), and total assets = $450,000. ROI will become $100,000 ÷ $450,000, which is .22. This is a decrease because the denominator has increased while the numerator has stayed the same. So ROI would not be increased by this.
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