Answer:
1. Computation of the Return on Investment:
= Profit/Average Invested Assets x 100
Beverage Division = $349/$2,627.5 x100 = 13.28%
Cheese Division = $634/$4,427.5 x 100 = 14.32%
2. Computation of the profit margin:
= Operating Income/Sales x 100
Beverage Division = $349/$2,681 x 100 = 13%
Cheese Division = $634/$3,925 x 100 = 16.2%
3. Computation of Investment Turnover:
= Sales/Shareholders' Equity + Debt
= Sales/Assets
Beverage Division = $2,681/$2,627.5 = 1 : 1
Cheese Division = $3,925/$4,427.5 = 0.89 : 1
Shareholders' Equity + Debt = Assets
Step-by-step explanation:
a) Data:
Beverage Division Cheese Division Total
Invested assets, beginning $ 2,662 $ 4,455 $ 7,117
Invested assets, ending 2,593 4,400 6,993
Sales 2,681 3,925 6,606
Operating income 349 634 983
Average invested assets 2,627.5 4,427.5 6,799.5
b) In the balance sheet, the total assets are always equal to the Shareholders' Equity and Total Liabilities. Since they are equal, the value of the assets can be used to substitute for Shareholders' Equity plus total liabilities. We have chosen to use the average invested assets for the Beverage and Cheese divisions as this smoothens the changes during the year.
c) The Return on Investment for this company is a profitability ratio which shows the efficiency of the investments made in the Beverage and Cheese divisions.
d) The profit margin per division is the percentage of the operating profit over the sales revenue for the Beverage and Cheese divisions. It shows how much of the divisional sales revenue was turned into divisional profit. It is also an efficiency measure that demonstrates management's ability to manage the costs of goods and services and the general costs of running the business, in order to generate enough divisional profits for the company.
e) The Investment Turnover compares the divisional sales revenues with the total investments made in generating the revenue. It shows the ability of the company's management to generate revenue from business funding for both the Beverage and Cheese divisions.