Sherwin-Williams is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail location), Consumer (paint sold through stores such as Sears, Home Depot, and Lowe's), Automotive (sales to auto manufacturers), International, and Administration. The following is selected hypothetical divisional information for the company's two largest divisions: Paint Stores and Consumer (in thousands of dollars).
_______________Sales Operating Income Total Assets
Paint stores.......$3,900,000.........$507,000...........$1,500,000
Consumer ........$1,250,000.........$175,000...........$1,562,500
Assume that management has specified a 20% target rate of return.
Requirements
Round all calculations to two decimal places.
1. Calculate each division's ROI.
2. Calculate each division's sales margin. Interpret your results.
3. Calculate each division's capital turnover. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate each division's RI. Interpret your results and offer recommendations for any divisions with negative RI.
6. Total asset data were provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices.
7. Describe some of the factors that management considers when setting its minimum target rate of return. Describe some of the factors that management considers when setting its minimum target rate of return.
8. Explain why some firms prefer to use RI rather than ROI for performance measurement.
9. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers.