Question

Exercise 10-8 Computing and Interpreting Return on Investment (ROI) [LO10-1] Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below: Division Queensland New South Wales Sales $ 1,539,000 $ 2,346,000 Average operating assets $ 570,000 $ 510,000 Net operating income $ 138,510 $ 140,760 Property, plant, and equipment (net) $ 257,000 $ 207,000

Required:

1. Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover.

2. Which divisional manager seems to be doing the better job?

Answer 1

Solution:

1) ROI		Queensland	new south wales
sales	a	$1,539,000	$2,346,000
net operating income	b	$138,510	$140,760
average operating asset	c	$570,000	$510,000
margin	d=b/a	9.00%	6.00%
turnover	e=a/c	2.70	4.60
ROI	f=d*e	24.30%	27.60%

2) new south wales division is doing better as its ROI is higher.