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: $1,000,000

Division 2:

Sales: $45,000

Expenses: $35,000

Asset Investment: $200,000

A. Management discovers that the ROI is the same for both divisions, and wants a deeper evaluation. Which division generates greater profitability per sales dollar?

B. Conner currently requires investments to meet a rate of return on asset investment of 5%. Which division has the greatest level of “residual income”?

C. Management discovers that the ROI is the same for both divisions, and wants a deeper evaluation. Which division has a higher efficiency in the use of assets to generate sales?

Answer 1

A.

Division 1

Net operating income = Sales - Expenses

= 200,000-150,000

= $50,000

Profit margin = Net operating income/ Sales

= 50,000/200,000

= 25%

Division 2

Net operating income = Sales - Expenses

= 45,000-35,000

= $10,000

Profit margin = Net operating income/ Sales

= 10,000/45,000

= 22.22%

Division 1 generates greater profitability per sales dollar

B.

Division 1

Residual income = Net operating income - ( Asset investment x Minimum rate of return)

= 50,000- (1,000,000 x 5%)

= 50,000-50,000

= $0

Division 2

Residual income = Net operating income - ( Asset investment x Minimum rate of return)

= 10,000- (200,000 x 5%)

= 10,000-10,000

= $0

Both division have the same level of “residual income

C.

Division 1

Turnover = Sales / Assets investment

= 200,000/1,000,000

= 0.2

Division 2

Turnover = Sales / Assets investment

= 45,000/200,000

= 0.23

Division 2 has a higher efficiency in the use of assets to generate sales.

Kindly comment if you need further assistance.

Thanks‼!