Chapter 19, Problem 22E

To determine

Prepare an excel spreadsheet showing return on sales (ROS) for through 2016 section. For each of the four measures of investment, calculate asset turnover (AT), and return on investment (ROI).

Explanation of Solution

Return on Investment (ROI) is a calculation of income split in the business unit by some amount of investment.

Return on sales (ROS), or profit per dollar, indicators the capacity of the manager

Controlling expenses and raising revenue to increase profits.

Asset turnover (AT), the sales dollars generated per dollar investment, assesses the ability of managers to raise revenue from a specified investment level.

The formula to calculate return on sales is:

$\text{ROS}=\frac{\text{Net operating income}}{\text{Sales}}$

The formula to calculate asset turnover (AT) is:

$\text{AT}=\frac{\text{Sales}}{\text{Average total assets}}$

The formula to calculate return on investment (ROI) is:

$\text{ROI}=\text{ROS}\times \text{AT}$

OR

$\text{ROI}=\text{Net operating income}÷\text{Average total assets}$

The following table shows the ROI; AT and ROI:

			Historical Cost		Current Cost
Region	Sales	Operating Income	Net Book Value	Gross Book value	Replacement Cost	Liquidation Value
North Atlantic	$2,350,000	$65,000	$250,000	$450,000	990,000	$350,000
Mid Atlantic	1,450,000	40,000	290,000	310,000	380,000	445,000
South Atlantic	500,000	30,000	100,000	180,000	650,000	980,000
Return on Sales (ROS)
North Atlantic		2.77%
Mid Atlantic		2.76%
South Atlantic		6.00%
Asset Turnover (AT)
North Atlantic			9.40	5.22	2.37	6.71
Mid Atlantic			5.00	4.68	3.82	3.26
South Atlantic			5.00	2.78	0.77	0.51
Return on Investment (ROI)
North Atlantic			26.00%	14.44%	6.57%	18.57%
Mid Atlantic			13.79%	12.90%	10.53%	8.99%
South Atlantic			30.00%	16.67%	4.62%	3.06%

Working Notes:

Calculate ROS:

For North Atlantic

$\begin{array}{c}\text{ROS}=\frac{\text{65,000}}{\text{2,350,000}}\\ =2.77\%\end{array}$

For Mid Atlantic

$\begin{array}{c}\text{ROS}=\frac{\text{40,000}}{\text{1,450,000}}\\ =2.76\%\end{array}$

For South Atlantic

$\begin{array}{c}\text{ROS}=\frac{\text{30,000}}{\text{500,000}}\\ =6.00\%\end{array}$

Calculate AT by using net book value of average total assets at historical cost:

For North Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{2,350,000}}{\text{250,000}}\\ =9.40\end{array}$

For Mid Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{1,450,000}}{\text{290,000}}\\ =5\end{array}$

For South Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{500,000}}{\text{100,000}}\\ =5\end{array}$

Calculate AT by using gross book value of average total assets at historical cost:

For North Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{2,350,000}}{\text{450,000}}\\ =5.22\end{array}$

For Mid Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{1,450,000}}{\text{310,000}}\\ =4.68\end{array}$

For South Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{500,000}}{\text{180,000}}\\ =2.78\end{array}$

Calculate AT by using replacement cost at current cost:

For North Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{2,350,000}}{\text{990,000}}\\ =2.37\end{array}$

For Mid Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{1,450,000}}{\text{380,000}}\\ =3.82\end{array}$

For South Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{500,000}}{\text{650,000}}\\ =0.77\end{array}$

Calculate AT by using liquidation value at current cost:

For North Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{2,350,000}}{\text{350,000}}\\ =6.71\end{array}$

For Mid Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{1,450,000}}{\text{445,000}}\\ =3.26\end{array}$

For South Atlantic

$\begin{array}{c}\text{AT}=\frac{\text{500,000}}{\text{980,000}}\\ =0.51\end{array}$

Calculate ROI by using net book value of average total assets at historical cost:

For North Atlantic

$\begin{array}{l}\text{ROI}=\text{65,000}÷\text{250,000}\\ \text{ROI}=26.00\%\end{array}$

For Mid Atlantic

$\begin{array}{l}\text{ROI}=\text{40,000}÷\text{290,000}\\ \text{ROI}=13.79\%\end{array}$

For South Atlantic

$\begin{array}{l}\text{ROI}=\text{30,000}÷\text{100,000}\\ \text{ROI}=30.00\%\end{array}$

Calculate ROI by using gross book value of average total assets at historical cost:

For North Atlantic

$\begin{array}{l}\text{ROI}=\text{65,000}÷\text{450,000}\\ \text{ROI}=14.44\%\end{array}$

For Mid Atlantic

$\begin{array}{l}\text{ROI}=\text{40,000}÷\text{310,000}\\ \text{ROI}=12.90\%\end{array}$

For South Atlantic

$\begin{array}{l}\text{ROI}=\text{30,000}÷\text{180,000}\\ \text{ROI}=16.67\%\end{array}$

Calculate ROI by using replacement cost at current cost:

For North Atlantic

$\begin{array}{l}\text{ROI}=\text{65,000}÷\text{990,000}\\ \text{ROI}=6.57\%\end{array}$

For Mid Atlantic

$\begin{array}{l}\text{ROI}=\text{40,000}÷\text{380,000}\\ \text{ROI}=10.53\%\end{array}$

For South Atlantic

$\begin{array}{l}\text{ROI}=\text{30,000}÷\text{650,000}\\ \text{ROI}=4.62\%\end{array}$

Calculate ROI by using liquidation value at current cost:

For North Atlantic

$\begin{array}{l}\text{ROI}=\text{65,000}÷\text{350,000}\\ \text{ROI}=18.57\%\end{array}$

For Mid Atlantic

$\begin{array}{l}\text{ROI}=\text{40,000}÷\text{445,000}\\ \text{ROI}=8.99\%\end{array}$

For South Atlantic

$\begin{array}{l}\text{ROI}=\text{30,000}÷\text{980,000}\\ \text{ROI}=3.06\%\end{array}$