The Woods and Water Company has two operating divisions, the Service Division an

Question

The Woods and Water Company has two operating divisions, the Service Division and the Irrigation Division. The company evaluates the performance of its divisions using the return on investment (ROI) measure. The following information pertains to the two divisions as of the end of the current year:

During the year, the Service Division repaired 8,000 units at an average service fee of $50.00 per unit. The Irrigation Division sold 250 units at an average price of $5,000. The company requires a minimum rate of return of 12%.

Required:

Compute the Return on Investment (ROI) measure for both divisions and the company as a whole. Based on ROI alone which division had the better performance? Round ROI measures to the nearest whole percent.

Explanation / Answer

Answer-

The Service Department is performing better as it has more Return on investment.

Particulars Service irrigation Total Sales                400,000 1250000             1,650,000 Less:- Direct Material                  40,000 400000                440,000 Direct Labour 200000 200000                400,000 Overhead 25000 250000                275,000 S & A cost 15000 150000                165,000 Total Cost                280,000    1,000,000             1,280,000 Profit                120,000       250,000                370,000 Total Operating Assets                400,000    1,000,000             1,400,000 Return on Investment 30 25 26.43

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