Profit margin and investment turnover ratio computations. The Chocolate Chip Division of the International Cookies Company had
Question:
Profit margin and investment turnover ratio computations. The Chocolate Chip Division of the International Cookies Company had a rate of return on investment
(ROI) of 12 percent (= $600.000/$5.000.000) during 2000. based on sales of
$10,000,000. In an effort to improve its performance during 2001, the company instituted several cost-saving programs, including the substitution of automatic equipment for work previously done by workers and the purchase of raw materials in large quantities to obtain quantity discounts. Despite these cost-saving programs, the company's ROI for 2001 was 10 percent (= $550.000/$5,500.000). based on sales of
$10,000,000.
a. Break down the ROI for 2000 and 2001 into profit margin and investment turnover ratios.
b. Explain the reason for the decrease in ROI between the 2 years using the results from part a.
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