Chapter 24, Problem 24.14EX

(a)

To determine

Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of profit margin:

$\text{Profit margin}=\frac{\text{Income from operations}}{\text{Sales}}$

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

$\text{Investment turnover}=\frac{\text{Sales}}{\text{Invested assets}}$

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Formula of ROI according to Dupont formula:

$\begin{array}{c}\text{Return on investment = Profit margin × Investment turnover}\\ \text{=}\frac{\text{Income from operations}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Invested assets}}\\ \text{=}\frac{\text{Income from operations}}{\text{Invested assets}}\end{array}$

Return on investment of MN Segment, PR Segment, SE Segment, and CP Segment, using Dupont formula

Explanation of Solution

Determine ROI of MN Segment, if income from operations is $6,818,000,000, sales are $20,356,000,000, and assets invested are $28,627,000,000.

$\begin{array}{c}\text{Return on investment = Profit margin × Investment turnover}\\ \text{=}\frac{\text{Income from operations}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Invested assets}}\\ =\frac{\$6,818,000,000}{\$20,356,000,000}\times \frac{\$20,356,000,000}{\$28,627,000,000}\\ \text{= }33.5\%\times 0.71\\ \text{= 23}\text{.8\%}\end{array}$

Determine ROI of PR Segment, if income from operations is $2,220,000,000, sales are $14,087,000,000, and assets invested are $22,056,000,000.

$\begin{array}{c}\text{Return on investment = Profit margin × Investment turnover}\\ \text{=}\frac{\text{Income from operations}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Invested assets}}\\ =\frac{\$2,220,000,000}{\$14,087,000,000}\times \frac{\$14,087,000,000}{\$22,056,000,000}\\ \text{= }15.8\%\times 0.64\\ \text{= 10}\text{.1\%}\end{array}$

Determine ROI of SE Segment, if income from operations is $661,000,000, sales are $5,979,000,000, and assets invested are $14,750,000,000.

$\begin{array}{c}\text{Return on investment = Profit margin }\text{× Investment turnover}\\ \text{=}\frac{\text{Income from operations}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Invested assets}}\\ =\frac{\$661,000,000}{\$5,979,000,000}\times \frac{\$5,979,000,000}{\$14,750,000,000}\\ \text{= }11.1\%\times 0.41\\ \text{= 4}\text{.6\%}\end{array}$

Determine ROI of CP Segment, if income from operations is $1,112,000,000, sales are $3,811,000,000, and assets invested are $7,506,000,000.

$\begin{array}{c}\text{Return on investment = Profit margin × Investment turnover}\\ \text{=}\frac{\text{Income from operations}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Invested assets}}\\ =\frac{\$1,112,000,000}{\$3,811,000,000}\times \frac{\$3,811,000,000}{\$7,506,000,000}\\ \text{= }29.2\%\times 0.51\\ \text{= 14}\text{.9\%}\end{array}$

(b)

To determine

To explain: The differences in profit margin, investment turnover, and return on investment of MN Segment, PR Segment, SE Segment, and CP Segment

Explanation of Solution

The following are the differences in profit margin, investment turnover, and return on investment of MN Segment, PR Segment, SE Segment, and CP Segment:

• Profit margin and investment turnover of MN Segment are high comparably, with 33.5%, and 0.71 and producing high ROI of 23.8%.

• Investment turnover of SE Segment is very low comparably and produces low ROI of 4.6%.

• CP Segment stands in the second place with 29.2% profit margin and produces ROI of 14.9%.

• PR Segment stands in the third place with 0.64 investment turnover and produces ROI of 10.1%.