ADMS 3510 Chapter Notes - Chapter 19: Asset Turnover, Historical Cost, Regional Policy Of The European Union
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| 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.
| “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make any move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.” |
| Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company’s Office Products Division for the most recent year are given below: |
| Sales | $ | 21,100,000 |
| Variable expenses | 13,350,400 | |
| Contribution margin | 7,749,600 | |
| Fixed expenses | 5,935,000 | |
| Net operating income | $ | 1,814,600 |
| Divisional operating assets | $ | 4,220,000 |
| The company had an overall return on investment (ROI) of 18.00% last year (considering all divisions). The Office Products Division has an opportunity to add a new product line that would require an additional investment in operating assets of $2,262,500. The cost and revenue characteristics of the new product line per year would be: |
| Sales | $ 9,050,000 |
| Variable expenses | 65% of sales |
| Fixed expenses | $ 2,534,000 |
| Required: | |
| 1. | Compute the Office Products Division’s ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
| 2. | If you were in Dell Havasi’s position, would you accept or reject the new product line? | ||||
|
| 3. | Why do you suppose headquarters is anxious for the Office Products Division to add the new product line? | ||||
|
| 4. | Suppose that the company’s minimum required rate of return on operating assets is 16.00% and that performance is evaluated using residual income. |
| a. | Compute the Office Products Division’s residual income for the most recent year; also compute the residual income as it would appear if the new product line is added. (Enter your Minimum Required Rate as a whole percentage (i.e., 0.12 should be entered as 12).) |
