Selected operating data for two divisions of Outback Brewing, Ltd., of Australia

Question

Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given
below (the currency is the Australian dollar, denoted here as $):
Required:

Division
New South
Queensland Wales
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,000,000 $7,000,000
Average operating assets . . . . . . . . . . . . . . . . $2,000,000 $2,000,000
Net operating income . . . . . . . . . . . . . . . . . . . $360,000 $420,000
Property, plant, and equipment (net) . . . . . . . . $950,000 $800,000

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? Why?

Explanation / Answer

New South: Margin= net operating income/ sales = 360000/4000000 = 9% Turnover= sales/ average operating assets = 4,000,000/2,000,000 = 2 ROI= margin x turnover = 9%*2 = 18% .......(A) Queensland: Margin= net operating income/ sales = 420,000/7,000,000 = 6% Turnover= sales/ average operating assets = 7,000,000/2,000,000 = 3.5 ROI= margin x turnover = 6%*3.5 = 21% .......(B) From A&B above, we can say that Queensland is doing a better job as it has a Higher Turnover & Higher ROI.

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