Cost center: Cost center incurs costs and does not generate the revenue directly Investment Center: Investment center takes care of revenue, cost and investment Profit Center: Profit center generate revenue and incur expenses Return on investment (ROI): Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows: R O I = O p e r a t i n g I n c o m e A v e r a g e t o t a l a s s e t s R O I ( E x p a n d e d ) = O p e r a t i n g I n c o m e S a l e s × S a l e s A v e r a g e t o t a l a s s e t s Or R O I = P r o f i t M a r g i n R a t i o × A s s e t T u r n o v e r r a t i o To Indicate: How return on investment helps in comparing the divisions of decentralized companies

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Chapter 14, Problem 9CDQ

To determine

Concept Introduction:

Cost center:

Cost center incurs costs and does not generate the revenue directlyInvestment Center:

Investment center takes care of revenue, cost and investment

Profit Center:

Profit center generate revenue and incur expenses

Return on investment (ROI):

Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:

ROI = Operating IncomeAverage total assets

ROI (Expanded)= Operating IncomeSales ×SalesAverage total assets

Or

ROI = Profit Margin Ratio ×Asset Turnover ratio

To Indicate:

How return on investment helps in comparing the divisions of decentralized companies

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