Question

Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows:

Division 1:

Sales: $200,000
Expenses: $150,000
Asset investment: $950,000

Division 2:

Sales: $45,000
Expenses: $35,000
Asset investment: $200,000

Based on ROI, which division is more profitable?

a. Division 1
b. Both divisions have the same ROI ratio
c. Division 2

Answer 1

The correct answer is:

Division 1 (a.)

Step-by-step explanation:

Return on investment (ROI) is a financial ratio used to calculate the benefit earned on an investment cost.

Mathematically, it is represented as:

`ROI = (Net\ Income)/(original\ cost\ of\ investment) * 100`

where:

Net income = Sales - expenses

Original cost of investment = asset invested

Now let us calculate the ROI for each division:

Division 1 :

Net income = Sales - Expenses = 200,000 - 150,000 = $50,000

Asset investment = $950,000

`ROI = (50,000)/(950,000) * 100\ \\\\ROI = 5.26\%`

Division 2:

Net income = 45,000 - 35,000 = $10,000

Asset investment = $200,000

`ROI = (10,000)/(200,000) * 100\\\\= ROI = 0.05\ *\ 100\ = 5\%`

Therefore, based on the ROI for both divisions, Division 1 has a greater ROI (5.26%) than Division 2 (5%) hence, Division 1 is more profitable.