Operating Average Net Sales Income Total Assets Paint Stores $3,950,000 $472,000
ID: 2573297 • Letter: O
Question
Operating
Average
Net Sales
Income
Total Assets
Paint Stores
$3,950,000
$472,000
$1,410,000
Consumer
1,315,000
193,000
1,590,000
Requirement 1. Calculate each division's ROI. Round all of your answers to four decimal places.
Begin by selecting the formula to calculate return on investment (ROI), and then enter the amounts to calculate each division's ROI. (Round your calculations to four decimal places and enter your answer as a percent rounded to two decimal places, X.XX%)
Operating income
/
Average total assets
=
ROI
Paint Stores
472000
/
1410000
=
3.35
%
Consumer
193000
/
1590000
=
12.14
%
Requirement 2. Calculate each division's profit margin ratio. Interpret your results.
Begin by selecting the formula to calculate profit margin ratio, and then enter the amounts to calculate each division's profit margin ratio. (Enter each profit margin ratio as a percent rounded to two decimal places, X.XX%.)
Operating income
/
Net sales
=
Profit margin ratio
Paint Stores
/
=
%
Consumer
/
=
%
The
___________
Consumer
Paint Stores
division is more profitable on each dollar of sales.
Requirement 3. Calculate each division's asset turnover ratio. Interpret your results.
Begin by selecting the formula to calculate asset turnover ratio, and then enter the amounts to calculate each division's asset turnover ratio. (Round your answers to four decimal places, X.XXXX.)
Net sales
/
Average total assets
=
Asset turnover ratio
Paint Stores
/
=
Consumer
/
=
The
Consumer
Paint Stores
division is more efficient in generating sales with its average total assets.
Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
First, select the expanded ROI formula.
Profit margin ratio
x
Asset turnover ratio
=
ROI
Now calculate ROI for each division using the expanded ROI formula. (Enter your answers as a percent rounded to two decimal places, X.XX%.)
Using the expanded formula, the ROI for the Paint Stores division is__________________
%.
Using the expanded formula, the ROI for the Consumer division is______________
%.
The Consumer division's profitability on each dollar of sales is
higher
lower
than the Paint Stores division's profitability. However, the Paint Stores division's efficiency is significantly
higher
lower
than the Consumer division's efficiency. These results cause the Paint Stores division's ROI to be
fairly similar to
higher than
lower than
the Consumer division's ROI.
Requirement 5. Calculate each division's RI. Interpret your results, and offer a recommendation for any division with negative RI.
First, select the formula to calculate residual income (RI).
Operating income
–
(
Target rate of return
x
Average total assets
)
=
RI
Now calculate each division's RI. (Use a minus sign or parentheses to enter negative residual income.)
The RI for the Paint Stores division is $
.
The RI for the Consumer division is $
.
Both divisions are
Neither division is
Only the Consumer division is
Only the Paint Stores division is
meeting management's target rate of return. A division with a negative RI should consider
decreasing its long-term debt
decreasing its operating income
eliminating nonproductive assets
.
Requirement 6. Describe some of the factors that management considers when setting its minimum target rate of return.
Management
cannot have
may have
different minimum target rates for different divisions. For example, management
might
would not
require a higher target rate of return from a division operating in a riskier business environment. Management will need to decide
what assets to include in total assets
what liabilities to include in total liabilities
for the calculations and whether it should be net of
accumulated depreciation.
income taxes.
Operating
Average
Net Sales
Income
Total Assets
Paint Stores
$3,950,000
$472,000
$1,410,000
Consumer
1,315,000
193,000
1,590,000
Explanation / Answer
Answer 1.
ROI = Operating Income / Average Total Assets
Paint Stores:
ROI = $472,000 / $1,410,000
ROI = 33.48%
Consumer:
ROI = $193,000 / $1,590,000
ROI = 12.14%
Answer 2.
Profit Margin Ratio = Operating Income / Net Sales
Paint Stores:
Profit Margin Ratio = $472,000 / $3,950,000
Profit Margin Ratio = 11.95%
Consumer:
Profit Margin Ratio = $193,000 / $1,315,000
Profit Margin Ratio = 14.68%
The Consumer division is more profitable on each dollar of sales.
Answer 3.
Asset Turnover = Net Sales / Average Total Assets
Paint Stores:
Asset Turnover = $3,950,000 / $1,410,000
Asset Turnover = 2.80
Consumer:
Asset Turnover = $1,315,000 / $1,590,000
Asset Turnover = 0.83
The Paint Stores division is more efficient in generating sales with its average total assets.
Answer 4.
ROI = Profit Margin Ratio * Asset Turnover Ratio
Paint Stores:
ROI =11.95% * 2.80
ROI = 33.46%
Consumer:
ROI = 14.68% * 0.83
ROI = 12.18%
The Consumer division's profitability on each dollar of sales is lower than the Paint Stores division's profitability. However, the Paint Stores division's efficiency is significantly higher than the Consumer division's efficiency. These results cause the Paint Stores division's ROI to be higher than the Consumer division's ROI.
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