Question

Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below:

	Division
	Queensland		New South Wales
Sales	$	2,176,000	$	3,445,000
Average operating assets	$	640,000	$	650,000
Net operating income	$	250,240	$	275,600
Property, plant, and equipment (net)	$	264,000	$	214,000

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

Queensland

return on investment = profit margin x assets turnover ratio

= 11.5 x 2.40

= 27.6

profit margin = net operating income / sale

= 250,240 / 2,176,000

= 0.115 x 100 = 11.5

assets turnover = sale / total assets

= 2,176,000 / 904,000

= 2.40

total assets = operating assets + fixed assets

= 640,000 + 264,000

= 904,000

New South Wales

return on investment = profit margin x assets turnover ratio

= 8 x 3.98

= 31.84

profit margin = net operating income / sale

= 275,600 / 3,445,000

= 0.08 x 100 = 8%

assets turnover = sale / total assets

= 3,445,000 / 864,000

= 3.98

total assets = operating assets + fixed assets

= 650,000 + 214,000

= 864,000

Manager of New South Wales division seems to be doing a better job because its return on investment is 31.84 which are higher than division Queensland.