1. Breaking the ROI computation into two separate elements helps the
manager to see important relationships that might remain hidden if net
operating income were simply related to operating assets. First, the im-
portance of turnover of assets as a key element to overall profitability is
emphasized. Prior to use of the ROI formula, managers tended to allow
operating assets to swell to excessive levels. Second, the importance of
sales volume in profit computations is stressed and explicitly recognized.
Third, breaking the ROI computation into margin and turnover elements
stresses the possibility of trading one off for the other in attempts to
improve the overall profit picture. That is, a company may shave its
margins slightly hoping for a great enough increase in turnover to in-
crease the overall rate of return. Fourth, ratios make it easier to make
comparisons between segments of the organization.
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