Chapter 10, Problem 10.51BP

Evaluate divisional performance (Learning Objective 3)

Sacramento Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through stores like Sears, Home Depot, and Lowe’s), Automotive (sales to auto manufacturers), International, and Administration. The following is selected hypothetical divisional information for its two largest divisions: Paint Stores and Consumer (in thousands of dollars).

Assume that management has specified a 21% target rate of return.

Requirements

Round all calculations to four decimal places.

1. 1. Calculate each division’s ROI.
2. 2. Calculate each division’s sales margin. Interpret your results.
3. 3. Calculate each division’s capital turnover. Interpret your results.
4. 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. 5. Calculate each division’s RI. Interpret your results and offer recommendations for any division with negative RI.
6. 6. Total asset data were provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices.
7. 7. Describe some of the factors that management considers when setting its minimum target rate of return.
8. 8. Explain why some firms prefer to use RI rather than ROI for performance measurement.
9. 9. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers.