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(1)
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:
To compute: Profit margin of N Division for the years 2014 to 2016
(1)
Explanation of Solution
Determine profit margin of N Division for the year 2014.
Determine profit margin of N Division for the year 2015.
Determine profit margin of N Division for the year 2016.
(2)
Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.
Formula of investment turnover:
To compute: Investment turnover of N Division for the years 2014 to 2016
(2)
Explanation of Solution
Determine investment turnover of N Division for the year 2014.
Determine investment turnover of N Division for the year 2015.
Determine investment turnover of N Division for the year 2016.
(3)
Formula of ROI:
To compute: Return on investment (ROI)of N Divisionfor the years 2014 to 2016
(3)
Explanation of Solution
Determine ROI of N Division for the year 2014.
Determine ROI of N Division for the year 2015.
Determine ROI of N Division for the year 2016.
(4)
To evaluate: Division N’s performance
(4)
Explanation of Solution
Evaluation of N Division’s performance:
By observing the operating results of N Division, the gross profit, income from operations, and revenues, it can be concluded that the performance of the division has increased considerably from 2014 to 2016. To know the actual performance, RPOI is computed in an extended form by using the profit margin, investment turnover as follows:
For 2014:
For 2015:
For 2016:
These computations show that the profitability of the division deteriorated from 2014 to 2016, due to the drop in investment turnover. So, the investments could not earn the required income, leading to decreased ROI. The assets invested were unable to earn the enough revenue.
This is a decreasing trend in the division’s performance.
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Chapter 24 Solutions
Working Papers, Chapters 1-17 for Warren/Reeve/Duchac's Accounting, 26th and Financial Accounting, 14th
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