Question: Please answer in the format below: 32. Return on Investment (ROI). Val

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Please answer in the format below:

32. Return on Investment (ROI). Valdez Company has two divisions–Appliances and Tools. (This is the same company as the previous exercise. This exercise can be assigned independently.) Segmented income statement information for the most recent fiscal year ended December 31 is shown as follows. Assume the Appliances division had average operating assets totaling $6,500,000 for the year, and the Tools division had average operating assets of $1,750,000. Valdez Company Segmented Income Statements for the current Fiscal Year Ended December 31 (dollar amounts are in thousands) Appliances Division Tools Division Sales Cost of goods sold Gross margin Allocated overhead Selling and administrative expenses Operating income Income tax expense (30% rate) Net income $ 3,000,000 1,600,000 $1,400,000 375,000 250,000 $ 775,000 232,500 $ 542,500 $1,000,000 430,000 $ 570,000 125,000 200,000 $ 245,000 73,500 $ 171,500 Managerial Accounting | Kurt Heisinger, Joe Hoyle Required: a. Calculate return on investment for each division. b. What does return on investment tell us about each division? Indicate why this measure is useful in evaluating investment centers.

Explanation / Answer

Solution a:

Solution b:

ROI is one of performance measure of divisions. The division having higher ROI is performing well. In the current scenario Tools division is having higher ROI of 14% as compared to Appliances division. Higher ROI shows that division is earning higher income on its investment.

ROI measure is useful, as it is help in evaluation of evaluation of division on the basis of incentive/penalty can be given to divisions. Further it also provide direction to the company to invest more in the division that provides higher ROI.

Computation of ROI Particulars Appliances Division Tools Division Operating Income $775,000.00 $245,000.00 Average operating assets $6,500,000.00 $1,750,000.00 Return on Investment (Operating Income / Average operating assets) 11.92% 14.00%

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