Chapter 24, Problem P24.35BPGB

Using ROI and Rl to evaluate investment centers

Learning Objective 5

3. Consumer's asset turnover ratio 0.8202

Tiger Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through home improvement stores), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint Stores and Consumer.

	Net Sales Revenue	OperatingIncome	Average Total Assets
Paint Stores	$ 4,000,000	$ 476,000	$ 1,420,000
Consumer	1,300,000	196,000	1,585,000

Management has specified a 19% target rate of return.

Requirements

1. Calculate each division's ROI. Round all of your answers to four decimal places.
2. Calculate each division's profit margin ratio. Interpret your results.
3. Calculate each division's asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate each division's Rl. Interpret your results, and offer a recommendation for any division with negative Rl.
6. Describe some of the factors that management considers when setting its minimum target rate of return.