Question

Apple Corporation is structured into three divisions: Austin, Brown and Caden. Each division operates as a separate stand-alone business, and is designated as an investment centre. The company uses return on investment (ROI) to evaluate the performance of each division. For the purpose of calculating divisional ROI, invested capital is defined as total assets (net book value) less current liabilities, and divisional operating profits after tax are used. Each division is required to achieve an ROI of at least 9%. The following data relates to the financial performance of the divisions for the year of 2019: Austin Brown Caden Operating Profits $1,000 $900 $1,200 Total Assets (NBV) 18,000 4,000 36,000 Current Liabilities 8,000 1,000 11,000 ROI 10% 30% 4.8% Both Austin and Brown mainly operate education centers with focus on conducting computer and IT courses. Major assets of Austin Division include computer equipment, popular software and furniture and fixtures. All these assets have been used since the business was set up in 2016. No additional purchase of new assets was made. Although Brown operates in a similar business, it has different operational philosophy. Brown leases its computer equipment and software in order to have the most updated IT facilities for their customers. Therefore, the lease (rental) expenses account for a high percentage of its total operating expenses. Caden runs two restaurants which were newly set in 2019. The target customers are the highclass clusters. Therefore, high amount was spent on decent and splendid furniture and decoration. Based on the ROI calculation, the management would rank Brown as the top performer while Caden is required to put significant effort to improve its performance.

REQUIRED: ( At least 100 words)

Suggest TWO points in the case that needs to be taken into account when interpreting divisional performance by using ROI.

Answer 1

RETURN ON INVESTMENT (ROI)

Return on investment ratio is also know as return assets ratio . It is used to measure the profitability of a division. The following bis the formula used to calculate return on investment

ROI = income / investment

in the case of Austin division , the division has the second highest roi compared to other 2 division . The major assets of Austin include computer, software, furniture which are expensive so the division has the more investment. It means the denominator is increased . So the roi is getting down . Austin division has the second highest profit but also has high investment.

In the case of brown division which has the highest roi of 30 % compared to other 2 divisions. The reason for highest roi is the brown division has a profit of 900 which is also similar to other 2 division , but the Brown division has only lower investment because greater percentage of equipment used in this divisions are leased. It will lead to higher roi ratio .

The caden division has the lowest roi compared to other 2 division. The reason for this lowest roi is cade , it is a restaurant the targeted customers are high class cluster, therefore high amount was invested in the restaurant furniture and decorations. It will lead to increase the denominator ( investment) and that will lead to decrease the ratio .

The above is the detailed interpretation about roi of three division

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