Question

		Operating	Average
	Net Sales	Income	Total Assets
Paint Stores	$3,950,000	$472,000	$1,410,000
Consumer	1,315,000	193,000	1,590,000

Requirement 1. Calculate each​ division's ROI. Round all of your answers to four decimal places.

Begin by selecting the formula to calculate return on investment​ (ROI), and then enter the amounts to calculate each​ division's ROI. ​(Round your calculations to four decimal places and enter your answer as a percent rounded to two decimal​ places, X.XX%)

Operating income

/

Average total assets

=

ROI

Paint Stores

472000

/

1410000

=

3.35

%

Consumer

193000

/

1590000

=

12.14

%

Requirement 2. Calculate each​ division's profit margin ratio. Interpret your results.

Begin by selecting the formula to calculate profit margin​ ratio, and then enter the amounts to calculate each​ division's profit margin ratio. ​(Enter each profit margin ratio as a percent rounded to two decimal​ places, X.XX%.)

Operating income

/

Net sales

=

Profit margin ratio

Paint Stores

/

=

%

Consumer

/

=

%

The

▼___________

Consumer

Paint Stores

division is more profitable on each dollar of sales.

Requirement 3. Calculate each​ division's asset turnover ratio. Interpret your results.

Begin by selecting the formula to calculate asset turnover​ ratio, and then enter the amounts to calculate each​ division's asset turnover ratio. ​(Round your answers to four decimal​ places, X.XXXX.)

Net sales

/

Average total assets

=

Asset turnover ratio

Paint Stores

/

=

Consumer

/

=

The

▼

Consumer

Paint Stores

division is more efficient in generating sales with its average total assets.

Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.

​First, select the expanded ROI formula.

Profit margin ratio

x

Asset turnover ratio

=

ROI

Now calculate ROI for each division using the expanded ROI formula. ​(Enter your answers as a percent rounded to two decimal​ places, X.XX%.)

Using the expanded formula, the ROI for the Paint Stores division is__________________

%.

Using the expanded formula, the ROI for the Consumer division is______________

%.

The Consumer​ division's profitability on each dollar of sales is

▼

higher

lower

than the Paint Stores​ division's profitability.​ However, the Paint Stores​ division's efficiency is significantly

▼

higher

lower

than the Consumer​ division's efficiency. These results cause the Paint Stores​ division's ROI to be

▼

fairly similar to

higher than

lower than

the Consumer​ division's ROI.

Requirement 5. Calculate each​ division's RI. Interpret your​ results, and offer a recommendation for any division with negative RI.

​First, select the formula to calculate residual income​ (RI).

Operating income

–

(

Target rate of return

x

Average total assets

)

=

RI

Now calculate each​ division's RI. ​(Use a minus sign or parentheses to enter negative residual​ income.)

The RI for the Paint Stores division is $

.

The RI for the Consumer division is $

.

▼

Both divisions are

Neither division is

Only the Consumer division is

Only the Paint Stores division is

meeting​ management's target rate of return. A division with a negative RI should consider

▼

decreasing its long-term debt

decreasing its operating income

eliminating nonproductive assets

.

Requirement 6. Describe some of the factors that management considers when setting its minimum target rate of return.

Management

▼

cannot have

may have

different minimum target rates for different divisions. For​ example, management

▼

might

would not

require a higher target rate of return from a division operating in a riskier business environment. Management will need to decide

▼

what assets to include in total assets

what liabilities to include in total liabilities

for the calculations and whether it should be net of

▼

accumulated depreciation.

income taxes.