Question

Two auto dealers, Legend Auto Sales and Reliable Auto Sales, compete in the same area. Both purchase autos for $10,000 each and sell them for $12,000 each. Both maintain 10 cars on the lot at all times. A local basketball legend owns Legend Auto Sales. As a result, Legend sells 100 cars each year, while Reliable sells only 50 cars each year. The dealerships have no other revenues or expenses.

Required:
The town banker has denied Reliable Auto Sales a loan because its return on net operating assets is inferior to its rival. The owner of Reliable Auto Sales has engaged you to help explain why its return on net operating assets is inferior to that of Legend Auto Sales. Please prepare a memorandum for Reliable Auto Sales explaining the problem. Present quantitative support for your conclusions.



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  • CreatedJanuary 22, 2015
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