Which formula represents the Return on Investment (ROI) in the Theory of Constraints?

The correct formula for calculating Return on Investment (ROI) in the context of the Theory of Constraints is represented by the equation that incorporates both throughput and operating expenses divided by inventory. The rationale behind this formula lies in the approach of the Theory of Constraints, which emphasizes the importance of maximizing throughput (the rate at which the system generates money through sales) while managing inventory and operating costs effectively.

Using this formula, you can determine how well an investment has been utilized to contribute to net income after accounting for operating expenses, relative to the investment in inventory. This perspective highlights the relationship between profit generation (throughput) and the costs associated with running the business (operating expenses) in relation to the resources tied up in inventory.

By considering both throughput and operating expenses while referencing inventory in the denominator, this formula provides a clearer picture of how effectively resources are being managed to generate returns. This approach is foundational in addressing constraints and optimizing the overall financial performance of a business.