Mastery Problem: Return on Investment, margin, and turnover

Return on Investment (ROI)

The manager of aninvestment centershould be evaluated based on revenues, costs, and investments. An evaluation based on net income ignores the amount of investment the investment center required. One way to measure operating profit in relation to investment is a calculation called thereturn on investment.

One formula for calculating return on investment is:Operating incomeInvested Assets

ROI is effective because it takes into consideration the three factors under the control of an investment center manager: revenues, costs, and investments. ROI measures the income (or return) earned on each dollar of investment.

APPLY THE CONCEPTS: Calculating return on investment

The divisional income statements for three divisions of the Silver Company are shown.

Silver Company Divisional Income Statements For the Year Ending December 31, 20Y8Division A Division B Division C Sales Revenue$1,218,000$809,600$408,000Operating expenses(718,620)(607,200)(216,240)Operating income before service department charges$499,380$202,400$191,760Service department charges(228,984)(8,096)(110,160)Operating income$270,396$194,304$81,600

Additional financial data from the three divisions of the Silver Company are shown.

Division A $1,160,000 Division B $704,000 Division C $480,000

Calculate the return on investment for each division. If required, round the ROI to the nearest hundredth of a percent (for example, 16.943% would be rounded to 16.94%).

Division A _____% Division B_____% Division C______%

APPLY THE CONCEPTS: Calculating margin and turnover

Calculate the margin and the turnover for each division. If required, round margin to the nearest tenth of a percent (for example, 14.6%) and turnover to two decimal places (for example, 0.82).

MarginDivision A_____% Division B _____%Division C____%

Turnover ______ _____ _____

The division showing the highest operating profitability is DivisionB

.

The division showing the highest operating efficiency is DivisionB

APPLY THE CONCEPTS: Using margin and turnover to calculate return on investment

A second way to calculate return on investment (ROI) isReturn on Investment = Margin x Turnover. Using the margins and turnovers you recorded above, calculate the return on investment for each division. If required, round the return on investment to the nearest hundredth of a percent (for example, 16.94%).

Return on investment Division A ____% Division B_____% Division C_____%