The Striped Chocolate Division of the International Confection Company had a rate of return on investment (ROI) of 12 percent (¼ $1,200,000/$10,000,000) during Year 7, based on sales of $20,000,000. In an effort to improve its performance during Year 8, the company instituted several cost saving programs, including the substitution of automatic equipment for work previously done by workers and the purchase of raw materials in large quantities to obtain quantity discounts. Despite these cost-saving programs, the company’s ROI for Year 8 was 10 percent (= $1,100,000/$11,000,000), based on sales of $20,000,000.

a. Break down the ROI for Year 7 and Year 8 into profit margin and investment turnover ratios.

b. Explain the reason for the decrease in ROI between the two years using the results from part a.