Question

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

Division A Division B Division C
Sales $ 12,840,000 $ 28,840,000 $ 26,050,000
Average operating assets $ 3,210,000 $ 7,210,000 $ 5,210,000
Net operating income $ 564,960 $ 346,080 $ 755,450
Minimum required rate of return 6.00 % 6.50 % 14.50 %
Required:

1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover.

Answer 1

To compute the return on investment (ROI) for each division, divide the net operating income by the average operating assets. The margin is the net operating income divided by sales revenue, and the turnover is sales revenue divided by average operating assets. Then, calculate the ROI by multiplying the margin and turnover.

Step-by-step explanation:

To compute the return on investment (ROI) for each division, we can use the formula: ROI = Net Operating Income / Average Operating Assets. The margin is the net operating income divided by sales revenue, and the turnover is sales revenue divided by average operating assets. Let's compute the ROI for each division:
Margin = Net Operating Income / Sales = $564,960 / $12,840,000 = 0.043988...
Turnover = Sales / Average Operating Assets = $12,840,000 / $3,210,000 = 3.997...
ROI = Margin * Turnover = 0.043988... * 3.997... = 0.175976...
Margin = Net Operating Income / Sales = $346,080 / $28,840,000 = 0.011999...
Turnover = Sales / Average Operating Assets = $28,840,000 / $7,210,000 = 3.9986...
ROI = Margin * Turnover = 0.011999... * 3.9986... = 0.047995...
Margin = Net Operating Income / Sales = $755,450 / $26,050,000 = 0.028999...
Turnover = Sales / Average Operating Assets = $26,050,000 / $5,210,000 = 4.9980...
ROI = Margin * Turnover = 0.028999... * 4.9980... = 0.144984...