Chapter 24, Problem 12E

To determine

Introduction:

Return on Investment:

Return on Investment (ROI) is a performance measure, which is used to evaluate the efficiency of an investment.It measures the amount of return on an investment, in relation to the investment's cost.

Profit Margin:

Profit margin is a profitability ratio which calculates the relation between net income and sales.

Investment Turnover:

Asset or Investment turnover ratio measures the sales generated by a company relative to the value of its assets. It is used as an indicator of the efficiency with which a company is deploying its assets in generating revenue.

To Calculate:

Requirement 1:

Return on Investment of both divisions

Answer to Problem 12E

Solution:

Beverage Division = 13.28%

Cheese Division = 14.32%

Explanation of Solution

Beverage Division

  $\begin{array}{l}ROI =\frac{NetIncome}{AverageInvestmentinAssets}x100\hfill \\ =\frac{349}{2627.5}x100\hfill \\ =13.28\%\hfill \\ \hfill \\ AverageInvestmentinAssets =\frac{Assetsinbeginning+Assetsatend}{2}\hfill \\ =\frac{2662+2593}{2}\hfill \\ =2627.5\hfill \end{array}$

Cheese Division

  $\begin{array}{l}ROI =\frac{NetIncome}{AverageInvestmentinAssets}x100\hfill \\ =\frac{634}{4427.5}x100\hfill \\ =14.32\%\hfill \\ \hfill \\ AverageInvestmentinAssets =\frac{Assetsinbeginning+Assetsatend}{2}\hfill \\ =\frac{4455+4400}{2}\hfill \\ =\text{ 44}27.5\hfill \end{array}$

Conclusion

Cheese Division has better ROI.

Requirement 2:

Profit Margin of both divisions