Return on investment (ROI): Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows: R O I = O p e r a t i n g I n c o m e A v e r a g e t o t a l a s s e t s R O I ( E x p a n d e d ) = O p e r a t i n g I n c o m e S a l e s × S a l e s A v e r a g e t o t a l a s s e t s Or R O I = P r o f i t M a r g i n R a t i o × A s s e t T u r n o v e r r a t i o Profit Margin Ratio: Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows: P r o f i t M a r g i n = O p e r a t i n g I n c o m e S a l e s Asset Turnover Ratio: Asset Turnover Ratio is an efficiency ratio that represents the sales earned on the average assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Asset Turnover Ratio is as follows: A s s e t T u r n o v e r R a t i o = S a l e s A v e r a g e t o t a l a s s e t s Requirement-1: The assets turnover ratio for each division

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Chapter 24, Problem S24.11SE

To determine

Concept Introduction:

Return on investment (ROI):

Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:

$R O I = \frac{O p e r a t i n g I n c o m e}{A v e r a g e t o t a l a s s e t s}$

$R O I (E x p a n d e d) = \frac{O p e r a t i n g I n c o m e}{S a l e s} \times \frac{S a l e s}{A v e r a g e t o t a l a s s e t s}$

Or

$R O I = P r o f i t M a r g i n R a t i o \times A s s e t T u r n o v e r r a t i o$

Profit Margin Ratio:

Profit Margin Ratio is a profitability ratio that represents the percentage income earned on the sales. It is calculated by dividing the Net Income by the Sales. The formulas to calculate the Profit margin is as follows:

$P r o f i t M a r g i n = \frac{O p e r a t i n g I n c o m e}{S a l e s}$

Asset Turnover Ratio:

Asset Turnover Ratio is an efficiency ratio that represents the sales earned on the average assets invested in the business. It is calculated by dividing the Sales by Average total assets. The formulas to calculate the Asset Turnover Ratio is as follows:

$A s s e t T u r n o v e r R a t i o = \frac{S a l e s}{A v e r a g e t o t a l a s s e t s}$

Requirement-1:

The assets turnover ratio for each division

To determine

Requirement -2:

The ROI for each division using the expanded formula

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California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2016. In preparing its insurance claim on the inventory loss, the company developed the following data: Inventory on January 1, 2016, $300,000; sales and purchases from January 1, 2016, to May 1, 2016, $1,300,000 and $875,000, respectively. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2016, is: a. $302,500. b. $360,000. c. $395,000. d. $455,000.

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