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Return on Investment (ROI). Valdez Company has two divisionsAppliances and Tools. (This is the same company as the previous exercise. This exercise can be assigned independently.) Segmented income statement information for the most recent fiscal year ended December 31 is shown as follows. Assume the Appliances division had average operating assets totaling $6,500,000 for the year, and the Tools division had average operating assets of $1,750,000.

Required:

1. Calculate return on investment for each division.

2. What does return on investment tell us about each division? Indicate why this measure is useful in evaluating investment centers.

Valdez Company Segmented Income Statements for the Current Fiscal Year Ended December 31 (dollar amounts are in thousands) Appliances Division Tools Division Sales Cost of goods sold Gross margin Allocated overhead Selling and administrative expenses Operating income Income tax expense (30% rate) Net income $3,000,000 1,600,000 $ 1,400,000 375,000 250,000 $ 775,000 232,500 $ 542,500 $1,000,000 430,000 $ 570,000 125,000 200,000 $ 245,000 73,500 $ 171,500