Forchen, Inc., provided the following information for two of its divisions for last year:
Required:
- 1. For the Small Appliances Division, calculate:
- a. Average operating assets
- b. Margin
- c. Turnover
- d.
Return on investment (ROI)
- 2. For the Cleaning Products Division, calculate:
- a. Average operating assets
- b. Margin
- c. Turnover
- d. Return on investment (ROI)
- 3. What if operating income for the Small Appliances Division was $2,000,000? How would that affect average operating assets? Margin? Turnover? ROI? Calculate any changed ratios (round to four significant digits).
1 (a)
Calculate the average operating assets for Division A.
Explanation of Solution
Operating assets: Operating assets are the assets which includes all the assets used to generate the operating income. Average operating assets are the average of beginning and ending operating assets.
Calculate the average operating assets for Division A:
Therefore, the average operating assets for Division A are $6,934,000.
1 (b)
Compute the Margin for the Division A.
Explanation of Solution
Margin: It is an amount income generated by a dollar of sales. It is calculated as follows:
Compute the margin for Division A:
Therefore, margin of Division A is 8%.
1 (c)
Compute the turnover of Division A.
Explanation of Solution
Turnover: It is an amount of sales generate by average operating assets. It is calculated by dividing the sales by the average operating assets in the assets, required to generate those sales.
Compute the turnover of Division A:
Therefore, turnover of Division A is 5.0 times of average operating assets.
1 (d)
Compute the ROI of Division A.
Explanation of Solution
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.
Compute the ROI of Division A:
Therefore, ROI of Division A is 40%.
2 (a)
Calculate the average operating assets for Division P.
Explanation of Solution
Calculate the average operating assets for Division P:
Therefore, the average operating assets for Division P are $5,800,000.
2 (b)
Compute the Margin for the Division P.
Explanation of Solution
Compute the margin for Division P:
Therefore, margin of Division P is 4%.
2 (c)
Compute the turnover of Division P.
Explanation of Solution
Compute the turnover of Division P:
Therefore, turnover of Division P is 5.4 times of average operating assets.
2 (d)
Compute the ROI of Division P.
Explanation of Solution
Compute the ROI of Division A:
Therefore, ROI of Division P is 21.6%.
3.
Explain the effect of change in operating income on average operating assets, margin, turnover, and ROI of Division A. Compute the new ratios if any.
Explanation of Solution
In the given situation, the new operating income is lower. Thus, both margin and ROI would be lower.
Average operating assets and turnover not affected by change in the operating income, since operating income is not a part of the equations for them.
Calculate the new margin and ROI for Division A:
Therefore, new margin is 5.77%.
Therefore, new ROI is 28.85%.
Want to see more full solutions like this?
Chapter 10 Solutions
EBK CORNERSTONES OF COST MANAGEMENT
- Jarriot, Inc., presented two years of data for its Furniture Division and its Houseware Division. Required: 1. Compute the ROI and the margin and turnover ratios for each year for the Furniture Division. (Round your answers to four significant digits.) 2. Compute the ROI and the margin and turnover ratios for each year for the Houseware Division. (Round your answers to four significant digits.) 3. Explain the change in ROI from Year 1 to Year 2 for each division.arrow_forwardDuring the current year, Sokowski Manufacturing earned income of $350,000 from total sales of $5,500,000 and average capital assets of $12,000,000. A. Based on this information, calculate asset turnover. B. Using the sales margin from the previous exercise, what is the total ROI for the company during the current year?arrow_forwardUsing the information in the previous exercises about Marleys Manufacturing, determine the operating income for department B, assuming department A sold department B 1,000 units during the month and department A reduces the selling price to the market price.arrow_forward
- The following selected data pertain to the Argent Division for last year: Required: 1. How much is the residual income? 2. How much is the return on investment? (Rounded to four significant digits.)arrow_forwardHardin Company is a division of a major corporation. The following data are for the latest year ofoperations: (35 points)Sales $ 19,600,000 Net operating income $ 470,400 Average operating assets $ 5,000,000 The company's minimum required rate of return 10 % Required:a. What is the division's margin?b. What is the division's turnover?c. What is the division's return on investment (ROI)?d. What is the division's residual income?arrow_forwardConner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows: Division 1: Sales: Expenses: Asset investment: $200,000 $150,000 $1,000,000 Division 2: Sales: $45,000 Expenses: $35,000 Asset investment: $200,000 Conner currently requires investments to meet a rate of return on asset investment of 5%. Which division has the greatest level of "residual income"? Select one: O a. Division 1 O b. Division 2 O c. Both divisions have the same return on investment ratioarrow_forward
- Coolbrook Company has the following information available for the past year: Sales revenue Cost of goods sold and operating expenses Net operating income Average invested assets The company's hurdle rate is 7.26 percent. Required: Calculate return on investment (ROI) and residual income for each division for last year. Recalculate ROI and residual income for each division for each independent situation that follows: a. Operating income increases by 11 percent. b. Operating income decreases by 10 percent. c. The company invests $259,000 in each division, an amount that generates $112,000 additional income per division. d. Coolbrook changes its hurdle rate to 5.26 percent. Complete this question by entering your answers in the tabs below. Calculate return on investment (ROI) and residual income for each division for last year. Note: Enter your ROI answers as a percentage rounded to two decimal places, (i .e., 0.1234 should be entered as 12.34% .) Sales revenue Cost of goods sold and…arrow_forwardCoolbrook Company has the following information available for the past year: River Stream Division Division Sales revenue $1,200,000 900,000 $1,800,000 1,300,000 Cost of goods sold and operating expenses Net operating income $ 300,000 $ 500,000 Average invested assets $1,200,000 $1,800,000 The company's hurdle rate is 6 percent. Required: 1. Calculate return on investment (ROI) and residual income for each division for last year. 2. Recalculate ROI and residual income for each division for each independent situation that follows: a. Operating income increases by 10 percent. b. Operating income decreases by 10 percent. c. The company invests $250,000 in each division, an amount that generates $100,000 additional income per division. d. Coolbrook changes its hurdle rate to 10 percent. Complete this question by entering your answers in the tabs below. Req 1 Reg 2A Req 28 Reg 20 Reg 2D Calculate return on investment (ROI) and residual income for each division for last year. (Enter your ROI…arrow_forwardCeder Products is a division of a major corporation. Last year the division had total sales of $21.520,000, net operating income of $538,000, and average operating assets of $8,000,000. The company's minimum required rate of return is 18%. 6. The division's margin is closest to: A. 2.5% B. 39.7% C. 6.7% D. 37.2%arrow_forward
- Coolbrook company has the following information available for the past year:(Chart in photo below) Required:1. calculate return on Investment (ROI) and residual income for each divison for the last year2. Recalculate ROI and residual income for the division for each independent situration that follows:a.) operating income increases by 9 percentb.) operating Income decreases by 9 percentc.) The company invests 255,000 in each division, an amount that generates 106,000 additional income per division.d.) Coolbrook changes its hurdle rate to 5.26 percentarrow_forwardThe condensed income statement for the Consumer Products Division of Fargo Industries Inc. is as follows (assuming no service department charges): Sales $540,000 Cost of goods sold 243,000 Gross profit $297,000 Administrative expenses 135,000 Income from operations $162,000 The manager of the Consumer Products Division is considering ways to increase the return on investment. a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that $1,350,000 of assets have been invested in the Consumer Products Division. Round the investment turnover to one decimal place. Profit margin % Investment turnover Rate of return on investment % b. If expenses could be reduced by $27,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division? Round the investment…arrow_forwardTan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Sales Set operating income. Average operating assets Required: 1. For each division, compute the return on investment (ROI). 2. Compute the residual income for each division assuming the company's minimum required rate of return is 16%. Complete this question by entering your answers in the tabs below. Division Osaka Yokohana $9,600,000 $ 26,000,000 $672,000 $2,340,000 $3,200,000 $ 13,000,000 Required 1 Required 2 For each division, compute the return on investment (ROI). RO Osaka Yokohama Required Required 2 >arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College