Chapter 9, Problem 2ADM

(a)

To determine

Income from operations: Income statement reports revenues and expenses from business operations, and the result of those operations, before taxes, other revenues and expenses, is referred to as income from operations.

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:

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

To compute: Income from operations for CO, F, and SC Segments

(b)

To determine

To compute: Profit margin of each of the segments.

(c)

To determine

Investment turnover of each of the segments

(d)

To determine

ROI of each of the segments using Dupont formula

(e)

To determine

To discuss: The business model of Company D in its relation to ROI