Exercise 11-8 Computing and Interpreting Return on Investment (ROI) [LO11-1] Sel

Question

Exercise 11-8 Computing and Interpreting Return on Investment (ROI) [LO11-1]

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

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?

Division Queensland New South Wales Sales $ 2,079,000 $ 3,224,000 Average operating assets $ 630,000 $ 620,000 Net operating income $ 166,320 $ 209,560 Property, plant, and equipment (net) $ 263,000 $ 213,000

Explanation / Answer

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

Margin

Turnover

ROI

Queensland

8%

3.3

26.40%

New South Wales

6.50%

5.2

33.80%

Return on investment (ROI) in terms of margin and turnover

= (Net operating Income/Sales) x (Sales/ Average operating assets)

Queensland

= ($166320/$2079000) x ($2079000/$630000)

= 8% x 3.3

= 26.40%

New South Wales

= ($209560/$3224000) x ($3224000/$620000)

= 6.50% x 5.20

= 33.80%

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

The manager of the New South Wales Division seems is doing the better job. It has higher ROI 33.8% as compared to a 26.4% ROI for the Queensland Division.

Margin

Turnover

ROI

Queensland

8%

3.3

26.40%

New South Wales

6.50%

5.2

33.80%

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