(1)
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:
To compute: Profit margin of N Division for the years 2014 to 2016
(1)
Explanation of Solution
Determine profit margin of N Division for the year 2014.
Determine profit margin of N Division for the year 2015.
Determine profit margin of N Division for the year 2016.
(2)
Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.
Formula of investment turnover:
To compute: Investment turnover of N Division for the years 2014 to 2016
(2)
Explanation of Solution
Determine investment turnover of N Division for the year 2014.
Determine investment turnover of N Division for the year 2015.
Determine investment turnover of N Division for the year 2016.
(3)
Formula of ROI:
To compute: Return on investment (ROI)of N Divisionfor the years 2014 to 2016
(3)
Explanation of Solution
Determine ROI of N Division for the year 2014.
Determine ROI of N Division for the year 2015.
Determine ROI of N Division for the year 2016.
(4)
To evaluate: Division N’s performance
(4)
Explanation of Solution
Evaluation of N Division’s performance:
By observing the operating results of N Division, the gross profit, income from operations, and revenues, it can be concluded that the performance of the division has increased considerably from 2014 to 2016. To know the actual performance, RPOI is computed in an extended form by using the profit margin, investment turnover as follows:
For 2014:
For 2015:
For 2016:
These computations show that the profitability of the division deteriorated from 2014 to 2016, due to the drop in investment turnover. So, the investments could not earn the required income, leading to decreased ROI. The assets invested were unable to earn the enough revenue.
This is a decreasing trend in the division’s performance.
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Chapter 24 Solutions
ACCOUNTING-W/CENGAGENOWV2 ACCESS
- 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).arrow_forwardCommunication The Norse Division of Gridiron Concepts Inc. experienced significant revenue and profit growth from 20Y4 to 20Y6 as shown in the following divisional income statements: There are no support department allocations, and the division operates as an investment center that must maintain a 15% return on invested assets. Determine the profit margin, investment turnover, and return on investment for the Norse Division for 20Y420Y6. Based on your computations, write a brief memo to the president of Gridiron Concepts Inc., Knute Holz, evaluating the divisions performance.arrow_forwardKent Tessman, manager of a Dairy Products Division, was pleased with his divisions performance over the past three years. Each year, divisional profits had increased, and he had earned a sizable bonus. (Bonuses are a linear function of the divisions reported income.) He had also received considerable attention from higher management. A vice president had told him in confidence that if his performance over the next three years matched his first three, he would be promoted to higher management. Determined to fulfill these expectations, Kent made sure that he personally reviewed every capital budget request. He wanted to be certain that any funds invested would provide good, solid returns. (The divisions cost of capital is 10 percent.) At the moment, he is reviewing two independent requests. Proposal A involves automating a manufacturing operation that is currently labor intensive. Proposal B centers on developing and marketing a new ice cream product. Proposal A requires an initial outlay of 250,000, and Proposal B requires 312,500. Both projects could be funded, given the status of the divisions capital budget. Both have an expected life of six years and have the following projected after-tax cash flows: After careful consideration of each investment, Kent approved funding of Proposal A and rejected Proposal B. Required: 1. Compute the NPV for each proposal. 2. Compute the payback period for each proposal. 3. According to your analysis, which proposal(s) should be accepted? Explain. 4. Explain why Kent accepted only Proposal A. Considering the possible reasons for rejection, would you judge his behavior to be ethical? Explain.arrow_forward
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