Question

) Sher Manufacturing Pty Ltd has two retail divisions., which have the following reported results for the year:

1. (i) Calculate the ROI for both divisions
2. (ii) Calculate residual income assuming the firm requires a return of 18% on invested capital
3. (iii) Which was the more successful division? Explain. (Hint: think carefully about this)

(b) Giratina is a retailer and is a division of a larger retail company. The following data relate to the most recent year of operations:

	Furnishing department	Dress making Division
Profit	$2,160,000	$441,000
Average invested Capital	12,000,000	2,100,000

Sales Revenue	$9,000,000
Cost of Goods Sold	4,950,000
Operating Expenses	3,600,000
Average Invested Capital	4,500,000

1. (i) Calculate the division’s return on sales, investment turnover and return on investment.
2. (ii) Describe how the division improve its ROI. (hint issue the 2 component ratios to explain)

Answer 1

Sher Manufacturing Pty
Answer i	Furnishing	Dress making	Note
Average invested Capital	12,000,000.00	2,100,000.00	A
Profit	2,160,000.00	441,000.00	B
Return on investment	18.00%	21.00%	C=B/A
Answer ii	Amount $	Amount $
Average invested Capital	12,000,000.00	2,100,000.00	D
Required return at 18%	2,160,000.00	378,000.00	E=D*18%
Profit	2,160,000.00	441,000.00	See B
Residual income	-	63,000.00	F=B-E
Giratina
Answer i	Amount $	Note
Sales Revenue	9,000,000.00	G
Less:
Cost of goods sold	4,950,000.00
Operating expenses	3,600,000.00
Total Costs	8,550,000.00	H
Net margin	450,000.00	I=G-H
Return on sales	5.00%	J=I/G
Average invested Capital	4,500,000.00	K
Investment turnover	2.00	L=G/K
Return on investment	10.00%	M=J*L

Answer ii

ROI can be improved by increasing sales revenue.

ROI can be improved by reducing expense thereby increasing net income.